Transitioning to a low-carbon electricity system requires investments on a very large scale. These investments require access to capital, but that access can be challenging to obtain. Most energy system models do not (explicitly) model investment financing and thereby fail to take this challenge into account. In this study, we develop an agent-based model, where we explicitly include power sector investment financing. We find that different levels of financing constraints and capital availabilities noticeably impact companies' investment choices and economic performances and that this, in turn, impacts the development of the electricity capacity mix and the pace at which CO2 emissions are reduced. Limited access to capital can delay investments in low-carbon technologies. However, if the financing constraint is too relaxed, the risk of going bankrupt can increase. In general, companies that anticipate carbon prices too high above or too far below the actual development, along with those that use a low hurdle rate, are the ones that are more likely to go bankrupt. Emissions are cut more rapidly when the carbon tax grows faster, but there is overall a greater tendency for agents to go bankrupt when the tax grows faster. Our energy transition model may be particularly useful in the context of the least financially developed markets.

To achieve the climate goals of the Paris Agreement, greenhouse gas emissions from the electricity sector must be substantially reduced. We develop an agent-based model of the electricity system with heterogeneous agents who invest in power generating capacity under uncertainty. The heterogeneity is characterised by the hurdle rates the agents employ (to manage risk) and by their expectations of the future carbon prices. We analyse the impact of the heterogeneity on the transition to a low carbon electricity system. Results show that under an increasing CO2 tax scenario, the agents start investing heavily in wind, followed by nuclear and to some extent in natural gas fired power plants both with and without carbon capture and storage as well as biogas fired power plants. However, the degree to which different technologies are used depend strongly on the carbon tax expectations and the hurdle rate employed by the agents. Comparing to the case with homogeneous agents, the introduction of heterogeneity among the agents leads to a faster CO2 reduction. We also estimate the so called “cannibalisation effect” for wind and find that the absolute value of wind does not drop in response to higher deployment levels, but the relative value does decline.

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