Evaluation of the mathematical and economic basis for conversion processes in the LEAP energy-economy model

Abstract

An evaluation was made of the mathematical and economic basis for conversion processes in the LEAP energy-economy model. Conversion processes are the main modelling subunit in LEAP used to represent energy conversion industries and are supposedly based on the classical economic theory of the firm. The study arose out of questions about the uniqueness and existence of LEAP solutions and their relation to classical equilibrium economic theory. An analysis of classical theory and LEAP model equations was made to determine their exact relationship. The conclusions drawn from this analysis were that LEAP theory is not consistent with the classical theory of the firm. Specifically, the capacity for factor formalism used by LEAP does not support a classical interpretation in terms of a technological production function for energy conversion processes. The economic implications of this inconsistency are suboptimal process operation and short term negative profits in years where plant operation should be terminated. A new capacity factor formalism, which retains the behavioural features of the original model, is proposed to resolve these discrepancies.