Non-Constant Elasticity of Substitution and Intermittent Renewable Energy

Saketh Aleti and Gal Hochman

Agricultural and Resource Economics Review, 2020, vol. 49, issue 2, 321-359

Abstract: In this article, we present a model of the electricity sector where generation technologies are intermittent. The economic value of an electricity generation technology is given by integrating its production profile with the market price of electricity. We use estimates of the consumer's intertemporal elasticity of substitution for electricity consumption while parameterizing the model empirically to numerically calculate the elasticity between renewables and fossil energy. We find that there is a non-constant elasticity of substitution between renewable and fossil energy that depends on prices and intermittency. This suggests that the efficacy and welfare effects of carbon taxes and renewable subsidies vary geographically. Subsidizing research into battery technology and tailoring policy for local energy markets can mitigate these distributional side effects while complementing traditional policies used to promote renewable energy.

Date: 2020
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