Capturing Natural Resource Dynamics in Top-Down Energy‑Economic Equilibrium Models

Abstract

Top-down energy-economic modeling approaches often use deliberately simple techniques to represent heterogeneous resource inputs to production. We show that for some policies, such as feed-in tariffs (FIT) for renewable electricity, detailed representation of renewable resource grades is required to describe the technology more precisely and identify cost-effective policy designs. We extend a hybrid approach for modeling heterogeneity in the quality of natural resource inputs required for renewable energy production in a stylized computable general equilibrium (CGE) framework. Importantly, this approach resolves nearflat or near-vertical sections of the resource supply curve that translate into key features of the marginal cost of wind resource supply, allowing for more realistic policy simulation. In a second step, we represent the shape of a resource supply curve based on more detailed data. We show that for the case of onshore wind development in China, a differentiated FIT design that can only be modeled with the hybrid approach requires less than half of the subsidy budget needed for a uniform FIT design and proves to be more cost-effective.