Equilibrium Transitions from Non Renewable Energy to Renewable Energy under Capacity Constraints

We study the transition between non renewable and renewable energy sources with adjustment costs over the production capacity of renewable energy. Assuming constant variable marginal costs for both energy sources, convex adjustment costs and a more expensive renewable energy, we show the following. With sufficiently abundant non renewable energy endowments, the dynamic equilibrium path is composed of a first time phase of only non renewable energy use followed by a transition phase substituting progressively renewable energy to non renewable energy before a last time phase of only renewable energy use. The investment into renewable energy may either begin before actual production of renewable energy or be delayed until the energy price achieves a sufficient gap with respect to the renewable energy cost. With an initially abundant non renewable resource, the features of the transition between non renewable and renewable energy do not depend upon the initial resource stock.