Decreasing Substitutability Between Clean and Dirty Energy

A review of the literature indicates a decreasing long-run elasticity of substitution between clean and dirty inputs as the share of clean inputs rises. In the power sector, which is the largest contributor to greenhouse gas emissions, integrating intermittent clean energy supply becomes increasingly difficult as the clean share rises. This paper describes a simple structural model of electricity generation which: demonstrates how the elasticity falls as the clean share rises; can replicate the range of results from the electricity literature; considers the effects of storage, and; facilitates estimation of a suitable production function. A bimodal production function with two elasticity regimes – an elasticity above 8 up to a 50 to 70 per cent clean share and an elasticity below 3 beyond this share – can replicate results well from the structural model