Abstract

Transitioning to a low-carbon electricity system requires investments on a very large scale. These investments require access to capital, but that access can be challenging to obtain. Most energy system models do not (explicitly) model investment financing and thereby fail to take this challenge into account. In this study, we develop an agent-based model, where we explicitly include power sector investment financing. We find that different levels of financing constraints and capital availabilities noticeably impact companies' investment choices and economic performances and that this, in turn, impacts the development of the electricity capacity mix and the pace at which CO2emissions are reduced. Limited access to capital can delay investments in low-carbon technologies. However, if the financing constraint is too relaxed, the risk of going bankrupt can increase. In general, companies that anticipate carbon prices too high above or too far below the actual development, along with those that use a low hurdle rate, are the ones that are more likely to go bankrupt. Emissions are cut more rapidly when the carbon tax grows faster, but there is overall a greater tendency for agents to go bankrupt when the tax grows faster. Our energy transition model may be particularly useful in the context of the least financially developed markets.

Highlights

  • Global CO2 emissions from power generation have increased continuously from 7.6 Gt CO2 in 1990 to around 14 Gt CO2 in 2018 as a result of fossil fuel combustion (IEA, 2020)

  • Despite the fact that global investments in new renewable capacity have grown significantly, the International Renewable Energy Agency (IRENA) has estimated that to meet the 1.5-degree target, the current annual investment in renewables has to be at least doubled in the 2016–2050 period (IRENA, 2020b)

  • Since we focus on the decisions made by companies and the effect of the financial feedback, we separate the initial coal and gas plants from the analysis, and they are all placed in an additional separate company that will not take part in the investment process, but that will run the plants throughout their lifetime

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Summary

Introduction

Global CO2 emissions from power generation have increased continuously from 7.6 Gt CO2 in 1990 to around 14 Gt CO2 in 2018 as a result of fossil fuel combustion (IEA, 2020). In order to reach the internationally agreed climate goals, it is critical to rapidly shift from fossil fuels to low-carbon technologies for power production. Meeting climate goals requires mobilizing large amounts of investments to low-carbon technologies (FS-UNEP and BNEF, 2019; IRENA, 2020a). As energy projects are typically capital intensive, with long pay-back periods, financing investments. Financing the Transition can be challenging, blocking the transition This suggests a need for a better understanding of the energy transition from the perspective of financial factors such as accessibility to, risks and costs of, and returns on, capital, in order to assess how these factors impact investment choices and transition pace

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