Exploring the Transition to a Low-Carbon Electricity System — Using Agent-Based Modeling

Doktorsavhandling, 2023

The ability to produce electricity has profoundly shaped human lives. Over time, the sources used for electricity generation have undergone several transitions. Currently, we are navigating a pivotal shift in the electricity system – decarbonization – a journey fraught with a myriad of challenges. A key challenge is that shifting to a low-carbon electricity system necessitates vast investments. The capital allocation decisions made today will influence global electricity production and associated emissions for the coming decades.

In this thesis, we have developed and employed an agent-based model of investments in the electricity system, called the HAPPI model (Heterogeneous Agent-based Power Plant Investment). The HAPPI model underscores the importance of factoring in heterogeneity, uncertainty, financial feedback, risk aversion, and adaptivity when modeling investment decisions in low-carbon transitions. This thesis primarily analyzes the influence of five important factors on investment decisions: hurdle rate, future carbon price expectation, access to capital, risk-aversion level, and adaptability. The findings provide insights at both the system and individual agent (investor) levels.

On the system level, the research explores the evolution of generation capacity mix, electricity prices, CO2 emissions, and the distribution of revenue across diverse technologies. Results show that, with growing carbon prices, there is a notable expansion in the capacity of wind, solar, and nuclear power plants, and a gradual phase-out of coal power plants.

On the agent level, the research explores the investment decisions of heterogeneous investors and the associated financial outcomes. Key observations highlight that agents with lower hurdle rates or lower risk or loss aversion tend to invest more, thereby enhancing their profits. However, this increased investment rate is associated with elevated bankruptcy risks, underscoring the intrinsic risk-return trade-off.

Moreover, the findings reveal that the low-carbon transition accelerates when investors have more access to capital. The transition is also expedited when uncertainty around future carbon prices is reduced, expectations for future prices are higher, and aversion to risk or losses diminishes.