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Energy Technological Change and Capacity Under Uncertainty in Learning

This paper explores the role of learning in managing the capacities of existing and emerging energy technologies. Specifically, we address how uncertainties in learning rates impact R&D investments into a range of electricity generating technologies. Understanding managerial strategic response under learning uncertainty is particularly important as decision makers face competing R&D portfolios, dwindling and unstable financial resources, and an imminent energy policy. We develop a risk-minimizing optimization model of an abridged global energy system to investigate the effects of uncertainties in technological learning on electricity capacity additions. Addressing the risks associated with uncertainties in technological learning is relevant to distill cost-effective decisions, and to develop risk-hedging strategies. We find that 1) the willingness to hedge against the inherent risks associated with uncertainty in energy technological learning is positively correlated with the risk premium; 2) near-term or early investments are required to achieve a mix of sustainable energy technological portfolios as a hedge against R&D uncertainty; and 3) the management of electricity generation capacities under learning uncertainty allows decision makers to chart a more prudent intermediate path for energy technological growth through the creation of a more diversified technological portfolio.