Deep transformations of the energy sector: A model of technology investment choice

Economy-energy equilibrium models have emerged as a dominant tool to investigate future pathways taking into account technological aspects, economic behavior, markets, and policy. A challenge for any model is to represent situations which involve large departures from a benchmark mix of energy technologies which would be associated with “deep” transformations of the energy sector (e.g., energy mix with a high penetration of renewables or near-complete decarbonization). This paper proposes a model which differentiates technologies at the level of investments and which is capable of representing large shifts in the market shares of competing technologies that produce a homogeneous energy good (e.g., electricity). We compare the partial equilibrium properties of the proposed technology investment choice model with the standard approach for modeling technology competition based on product differentiation. We also embed both approaches in a numerical general equilibrium multi-sector Ramsey growth framework. We find that the technology investment choice model overcomes some important limitations of the standard approach and is more suited to accommodate large changes in market shares of energy technologies in response to highly stringent energy and climate policy.