Pricing Energy Resources Under Transition to Alternative Energy

Resource pricing has specific features in the presence of alternative technologies providing substitutes for conventional non-renewable resources. The sources of alternative energy for fossil fuels include wind, solar and biofuel energy. In this chapter, we consider a model of gradual energy transition for an energy-supplying industry. Exhaustion of a conventional non-renewable resource in this model causes a decline of the relative price of alternative energy. The market share of this energy in the energy mix of consumers is increasing as a result of gradual substitution of renewables for conventional resources. An important property demonstrated below is the Green Paradox: a higher consumer preference for alternative energy implies a higher intensity of the conventional resource extraction in the near term.