Non-Renewable and Intermittent Renewable Energy Sources: Friends and Foes?

Abstract

This paper studies the links between non-renewable and intermittent renewable energy sources in the production of electricity. We argue that the relationship between the price of natural gas and investments in solar and wind capacity is non-linear and can be represented by an inverted-U shape. Hence, for relatively low natural gas prices, the two modes of production are substitutes. After a price threshold is reached, the two are complementary. A theoretical model explains this as the trade-off resulting from two forces: the input price differential of these two modes of production and the risks related to the unpredictable nature of renewable energy. Using U.S. state-level data from 1998 to 2012, we find that this relationship is robust to various empirical specifications.

Keywords: Renewable energy production, natural gas, factor complementarity, electricity production

JEL Classification: D22, D24, Q41, Q42