Optimal Renewable Energy Transition Strategies for Oil and Gas Producers

Abstract

Global warming is one of the greatest challenges our society faces. Initial regulatory attempts to curtail greenhouse gas emissions have worked in the United States but recently, under a more conservative administration, many of the utilized incentive structures and research efforts are being rolled back to balance years of government overspending. In consequence, citizens and academics have looked increasingly to private enterprises to create solutions to slow or end global warming. Building off of a body of game theory literature originally applied to monopolist, macro-economic renewable energy transitions, we propose a reframed mathematic problem that describes an individual oil and gas company's investment decision into a renewable energy alternative or `backstop' technology. Using convex optimization, we solve for the non-renewable and renewable investment path of the company that optimizes the firm's net present value. We find that over a long-term strategic horizon, it is optimal for an oil and gas company to invest in renewable energy to avoid the exhaustible limits of oil and to capitalize on the decreasing costs of renewable energy. Performing sensitivity analyses, we study the effects of carbon taxes, solar technology improvements, expected oil pricing volatility, and other factors on the investment decision for the company.