Investment in energy is relatively complex in IFs, because changes in investment are the key factor that allows us to clear the energy market in the long term.  It is also different and perhaps slightly more complex in IFs than investment in agriculture.  Whereas the latter involves computing a single investment need for agricultural capital, and subsequently dividing it between land and capital, in energy a separate demand or need is calculated for each energy type, based on profit levels specific to each energy type.

We begin by calculating a total energy investment need (TINEED) to take to the economic model and place into the competition for investment among sectors.  This investment need is a function of energy demand, adjusted by a number of factors, some global and some country-specific. To begin with, TINEED is calculated as

where

• mulendem is the ratio of global energy demand per unit GDP in the current year to that in the previous year

• wkenenpri is the ratio of global energy capital to global energy production

• mulkenenpr is the ratio of wkenenpr in the current year to that in the previous year

• mulwst and mulstocks are factors related to global energy stocks. mulwst is calculated using the ADJSTR function, where: the first order difference is that between global energy stocks, wenstks, and desired global energy stocks, DesStocks = dstlen * wstbase; the second order difference is between the level of world energy stocks in the current year and those in the past year; and the elasticities are given by the parameters elenpr and elenpr2 . mulstocks is also related to global energy stocks, but is more directly related to the desired level of global energy stocks:

Note that mulstocks will always take on a value between ¼ and 4.

• mulrprof is a function of the expected level of profits in the energy sector as a whole in a country, EPROFITR.  Energy profits are calculated as the ratio of returns, EnReturn, to costs, ProdCosts.  EPROFITR is actually a moving average of these profits relative to those in the base year, with a historical weighting factor controlled by the parameter eprohw .  In full, we have:

^[1]

We can now calculate mulrprof using the ADJSTR function.  The first order difference is between the current value of EPROFITR and a target value of 1; the second order difference is the change in the value of EPROFITR from the previous year; the elasticities applied to these differences are given by the parameters eleniprof and eleniprof2 .

• mulrenew is a function of the share of other renewables in the energy mix in a country.  It is assigned a value of 1 unless the production of energy from renewables exceeds 70% of total energy demand.  If so, we have:

Given these conditions, mulrenew can take on values between 0.5 and 1, with larger values associated with larger amounts of renewable production.

• sendeminvr is a moving average of the ratio of investment need to energy demand in a country, with an accounting for changes in the global capital production ratio since the first year and is updated as^[2]:

After this initial calculation, two further adjustments are made to TINEED.  The first is a reduction related to a possible reduction of inventory, invreduc, carried over from the previous year.  The calculation of invreduc is described later in this section, where we look at reductions in investment in specific energy types due to resource constraints or other factors. The effect on TINEED is given as:

Thus, the reduction in TINEED can be no more than 60 percent.

Finally, the user can adjust TINEED with the use of the multiplier eninvm .

Before this total investment need, TINEED, is passed to the Economic model, there is a chance that it may need to be further reduced.  This depends on the calculation of a bound, TINeedBound.  TINeedBound arises from a bottom-up calculation of the investment needs for each energy type individually, ineed.  These depend upon the profits for each energy type and any possible bounds on production related to reserves and other factors.

As with the estimate of total profits to energy, the returns by energy type depend upon production and costs. 

For the non-fossil fuel energy types – hydro, nuclear, and other renewable – EnCost is based solely on capital depreciation

where

• e = hydro, nuclear, renew

For the fossil fuel energy types – oil, gas, and coal – we must also consider any possible carbon taxes. EnCost is calculated as 

where

• e = oil, coal, gas
• carfuel is the carbon content of the fuel in tons per BBOE
• AvgCarFuel is the unweighted arithmetic average of the carbon content of oil, gas, and coal
• carbtax is an exogenously specified country-specific carbon tax in $ per BBOE
• emtax is the number of years since the first year plus one multiplied by 2

The change in eprofitrs from the first year is then calculated as:

An average return, avgreturn, is calculated as the weighted sum of the individual returns:

Investment need by energy type, ineed, grows in proportion to capital and as a function of relative profits.

where

• elass are country and energy-specific user controlled parameters

At this point, ineed is checked to make sure that it does not fall by more than 20% or increase by more than 40% in any single year. 

Also, if the user has set an exogenous target for production growth, i.e., eprodr > 0, all of the above is overridden and ineed is calculated as:

These investment needs are checked to make sure that they do not exceed what the known reserve base can support.  This applies only to oil, gas, coal, and hydro. An initial estimate of the maximum level of investment is given by:

where

• e = oil, gas, coal, or hydro