On the dynamics of competing energy sources

We characterize the dynamics of energy markets in which energy is derived from polluting (fossil) and clean (solar) resources. The analysis is based on geometric optimal control considerations. An important feature of solar energy technologies is that their cost of supply is predominantly due to upfront investment in capital infrastructure (rather than to actual supply rate) and this feature has important implications for the market allocation outcome. In particular, it gives rise to a threshold behavior in that solar energy is adopted only when the price of fossil energy exceeds a certain threshold. Under this condition solar technologies will (eventually) dominate energy supply by driving fossil energy altogether out of the energy sector. A tax on fossil energy can have a substantial impact since it changes the threshold price. A quantity restriction (e.g., a cap on fossil energy) allows for the coexistence of clean and polluting energy technologies also in the long run, and its effect on the use of fossil energy is more moderate.