# **5. Conclusion**

Our analysis makes several simplifications. For instance, we do not account for knowledge accumulation and directed technical change, which have been found to play a key role in the optimal transition from fossil to renewable energy (Tahvonen and Salo, 2001; Acemoglu et al., 2012; Andr ́e and Smulders, 2014). Knowledge spillovers would tend to increase the short-term gap between optimal investment in renewable and gas power (Rosendahl, 2004; del Rio Gonzalez, 2008), adding to the effect of adjustment costs studied here. We also disregarded uncertainty, known to play a key role in optimal accumulation of capital (Pindyck, 1991), optimal emission reduction pathways (Ha Duong et al., 1997), and optimal extraction of several energy sources (Gaudet and Lasserre, 2011). Finally, we did not account for the possibility to retrofit existing plants (notably with carbon capture and storage), and the possibility to use cleaner fuels (in particular derived from biomass) in existing power plants.

Notwithstanding these limitations, our analysis suggests that capacity constraints and adjustment costs play an essential role in the transition from coal to gas and renewable energy. In particular, investment in renewable power should start before coal and gas resources are phased out, and should always be higher than investment in gas power. The transition to carbon-free power may nonetheless benefit from temporary investment in intermediate technologies such as gas, to decrease the need for more expensive renewable in the short term. The resulting plants would however need to be subsequently decommissioned before the end of their natural lifetime, to give room to more carbon-free power in the medium term.

Our results shed light on technical choices (e.g. investors can consider gas plants with shorter scheduled lifetimes or an option to retrofit) as well as policy decisions (in setting milestones for carbon-free power and preparing for the social consequences of decommissioning fossil-fueled plants). Moreover, we warn that the levelized cost of electricity (LCOE) computed against current price signals is biased toward gas power and against renewable power. An accurate valuation of different types of power plants requires to anticipate a comprehensive long-term investment and production pathway, and in particular that gas built to replace coal in the short term may itself be replaced with renewable in the medium term.

Finally, while this paper focuses on power generation, it more broadly informs on the ordering and assessment of investment in polluting fossil-fueled and clean capital; its results could be extended to other capitalistic and energyintensive sectors, such as buildings or transportation.

# **References**

- Acemoglu, D., Aghion, P., Bursztyn, L., Hemous, D., 2012. The environment and directed technical change. American Economic Review 102 (1), 131–166.

- Allen, M., Frame, D., Huntingford, C., Jones, C., Lowe, J., Meinshausen, M., Meinshausen, N., 2009. Warming caused by cumulative carbon emissions towards the trillionth tonne. Nature 458 (7242), 1163–1166.

- Alvarez, R. A., Pacala, S. W., Winebrake, J. J., Chameides, W. L., Hamburg, S. P., 2012. Greater focus needed on methane leakage from natural gas

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