Energy substitution and technology costs in a transitional economy

Abstract

Traditional wisdom suggests that fossil-dominated energy mix is problematic to sustainable development. Like many countries, the Egyptian government has set ambitious targets for a possible transition towards renewable energy sources. In this study, a production model is adopted to examine the feasibility of energy substitution in Egypt and subsequently quantify the emissions reduction potential that arises from such a conversion. First, results suggest that renewable energy currently has no significant impact on economic growth in Egypt. However, it has the potential to contribute a 5% growth share if capital investment is at least doubled beyond current levels. Second, while energy substitution is possible from a technological standpoint, economically, inter-fuel substitution is limited in practice due to higher costs associated with renewable power generation technologies. This is further confirmed by the two investment scenarios which point to evidence of marginal reductions in nonrenewable energy (between 0.08% and 0.13%) and CO2 emissions when energy substitution is carried out. In general, these findings have implications for economic growth, renewable energy expansion, and CO2 emissions not only in Egypt but other developing countries as well.