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The Transition to Nondepletable Energy: Social Planning and Market Models of Capacity Expansion

Author

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  • Stephen G. Powell

    (Dartmouth College, Hanover, New Hampshire)

  • Shmuel S. Oren

    (University of California, Berkeley, California)

Abstract

As depletable energy becomes increasingly scarce and expensive, energy markets will turn to a multitude of nondepletable sources of energy. The rate at which this transition occurs will depend on the quantities of fuels available, production costs, government policies, and the choices of major producers. In this paper, we analyze the transition to nondepletable fuels, first in the context of a social planning model, then using a Stackelberg model to represent the dynamic game between owners of depletable and nondepletable fuels. We show that the pace of capacity expansion in the nondepletable sector has a strong influence on socially optimal energy prices and production rates. With the Stackelberg model, we characterize the strategy a market-dominating producer of depletable energy will use against the nondepletable sector. Numerical implementations of this model allow us to compare the socially optimal and market-determined outcomes. Our results show how a dominant depletable-energy producer can manipulate the nondepletable sector by pricing at the marginal cost of backstop output during an early phase of resource depletion.

Suggested Citation

  • Stephen G. Powell & Shmuel S. Oren, 1989. "The Transition to Nondepletable Energy: Social Planning and Market Models of Capacity Expansion," Operations Research, INFORMS, vol. 37(3), pages 373-383, June.
    • Handle: RePEc:inm:oropre:v:37:y:1989:i:3:p:373-383
    DOI: 10.1287/opre.37.3.373
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    Cited by:

    1. VARDAR, N. Baris, 2013. "Imperfect resource substitution and optimal transition to clean technologies," LIDAM Discussion Papers CORE 2013072, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    2. Amigues, Jean-Pierre & Kama, Alain Ayong Le & Moreaux, Michel, 2015. "Equilibrium transitions from non-renewable energy to renewable energy under capacity constraints," Journal of Economic Dynamics and Control, Elsevier, vol. 55(C), pages 89-112.
    3. Okullo, Samuel J. & Reynès, Frédéric & Hofkes, Marjan W., 2021. "(Bio-)Fuel mandating and the green paradox," Energy Economics, Elsevier, vol. 95(C).
    4. Kollenbach, Gilbert, 2017. "On the optimal accumulation of renewable energy generation capacity," Journal of Economic Dynamics and Control, Elsevier, vol. 77(C), pages 157-179.
    5. Jouvet, Pierre-André & Schumacher, Ingmar, 2012. "Learning-by-doing and the costs of a backstop for energy transition and sustainability," Ecological Economics, Elsevier, vol. 73(C), pages 122-132.
    6. Ambrosius, Mirjam & Grimm, Veronika & Kleinert, Thomas & Liers, Frauke & Schmidt, Martin & Zöttl, Gregor, 2020. "Endogenous price zones and investment incentives in electricity markets: An application of multilevel optimization with graph partitioning," Energy Economics, Elsevier, vol. 92(C).
    7. Toman, Michael & Krautkraemer, Jeffrey, 2003. "Fundamental Economics of Depletable Energy Supply," RFF Working Paper Series dp-03-01, Resources for the Future.
    8. Benchekroun, Hassan & van der Meijden, Gerard & Withagen, Cees, 2019. "An oligopoly-fringe non-renewable resource game in the presence of a renewable substitute," Journal of Economic Dynamics and Control, Elsevier, vol. 105(C), pages 1-20.

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