Financial stability at risk due to investing rapidly in renewable energy

Karolina Safarzyńska*, Jeroen C.J.M. van den Bergh

*Corresponding author for this work

Research output: Contribution to JournalArticleAcademicpeer-review

Abstract

We present novel insights about effective energy policies using an agent-based model. The model describes relevant feedback mechanisms between technological evolution, the interbank market and the electricity sector. Analysis with it shows that energy policies affect interbank connectivity and hence the likelihood of cascades of bank failures. This effect has not been studied before in the literature. In particular, we find that investments in renewable energy reduce interbank connectivity, increasing the probability of bank failures, while raising taxes on energy has an opposite effect. Increasing the share of renewable energy in electricity production initially increases the price of electricity, and thus improves profits and the ability to re-pay debts of incumbent power plants. However, when the share of renewable energy increases too quickly, financial stability may be at stake as the burden of financing investments in renewable energy offsets the improved profitability of existing power stations. All in all, this study provides a unique and novel perspective on the relationship between renewable energy investments and financial stability.

Original languageEnglish
Pages (from-to)12-20
Number of pages9
JournalEnergy Policy
Volume108
DOIs
Publication statusPublished - 2017

Keywords

  • Complexity
  • Financial stability
  • Renewable energy
  • Sustainability transitions

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