IntERACT
MODEL
WORKING PAPER NO. 01
16. September 2013
Lars B. Termansen
Birgitte Gersfelt
Kristoffer S. Andersen
Rikke Næraa
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What is IntERACT – Introduction
Abstract:
The IntERACT model setup integrates a general equilibrium model
with a technical energy system model. IntERACT will be able to evaluate long term consequences of climate and energy related policy initiatives. However, the model is ill suited for evaluating short term effects. The purpose of this paper is to give a short overview of the
model setup as well as shed light on the strengths and weaknesses of
the chosen methodology
Disclaimer: The views expressed in this Working Paper Series represent work in progress,
and do not necessarily represent those of the Danish Energy Agency or policies of the Danish
Ministry of Climate, Energy and Building. The papers do not themselves represent policy advice in any form.
The papers are internal working papers published in good faith to inform a wide audience.
While every effort is made to keep available working papers current, the Danish Energy
Agency, its employees or agents make no warranty, expressed or implied, as to the accuracy
of the information presented herein.
The Working Paper Series include work undertaken by Danish Energy Agency staff as well as
work undertaken by external researchers or consultants.
Please do not cite without permission.
Initiated by The Energy Agreement and embedded in the Danish Energy Agency
The Energy Agreement of 22. March 2012 establishes the framework for developing a general
equilibrium model of Denmark. In the period 2012-2015 the project is funded with 15.2 million DKK. The wording of the energy agreement is:
Development of a general equilibrium model for modeling the energy system and economic system to identify effective policies and future regulatory initiatives.
The IntERACT development is embedded in the Danish Energy Agency in order to tap in to
the established expertise and modeling tools available in the agency.1
IntERACT links a general equilibrium model with a technical model
IntERACT is developed to both have a satisfactory description of the Danish economy as well
as the Danish energy system, and especially the link between the two. This entails that IntERACT is developed with a strong focus on the interactions between energy system and the
overall economy. The strength of IntERACT’s model setup is exactly the focus on these interactions of how energy policy influences the economy and how the economy influences the
energy system.
The complete model setup consists of a top-down economic model and a bottom-up energy
model. The top-down model describes the macroeconomic relationships, ie. economic flows,
between firms, households, the public sector and international trade. The bottom-up model
describes the energy system using a detailed technical description of the production and use of
fuels and energy flows.
The top-down model is a new general equilibrium model of Denmark and the bottom-up
model is a new take on the international TIMES modeling framework applied to the Danish
energy system. The Danish Energy Agency is in charge of developing both models and the
link between them. The modeling setup is shown in figure 1.
Figur 1: The IntERACT-model
1
The acronym relates to “INTegrated Economic eneRgy Applied Computational Tool.“
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The general equilibrium model yields a consistent description of the overall economy based
on optimizing agents operating under rational behavior. The economic model will among others tings be able to evaluate welfare effects and any sectorial changes from applying various
energy and climate policies.
The technical description in the TIMES-DK model will be able to give detailed and technological description of the energy system. The modeling will take into account physical characteristics, technical constraints in both producing and using energy, as well as an explicit modeling of technological change under a range of a priori restrictions and imposed rigidities in
technological uptake.
The purpose of linking a general equilibrium model with a technical model is to best utilize
each of the strengths of the modeling types. The models will supplement and complement
each other and by linking them, we tap into each of the main strengths of the two models in
applied policy analyses.
In the project the general equilibrium model and the TIMES-DK model is developed in parallel.
More detailed description of the models will be documented in this working paper series.
Energy services are the crux of the link
Macroeconomic model often use energy goods directly in the modeling of energy use, eg. use
of oil or gas. This applies to models such as the EMMA model and the international GTAP
model. This means that these models are not well suited to describe large technological
changes in the production and use of energy, which is expected when imposing a green transition of the economy and energy system. In order to tackle this challenge, IntERACT focuses
on the actual energy service instead of the physical energy good. This has also been done in
the Mini-DREAM model used in the work by the Climate Commission.
It is the concept of energy services that binds the two models together in IntERACT. An energy service is a representation of the function of the service that energy actually delivers –
not the actual fuel itself. Examples of energy services for households could be lighting and
space heating. For firms energy services could be melting, casting or pumping.
The premise in IntERACT is that agents make economic decision based on the (relative) prices of energy services, while the specific fuel use and the specific technology applied in order
to obtain the energy service is secondary for the agent.
It is TIMES – the technical model – that optimizes how the energy system is set up. At a given demand for an energy service, TIMES finds the most cost efficient way of delivering that
service. The composition of the energy system is basically optimized from three types of information: prices of fuels, data for technology and a range of other restrictions, eg. regulation
slow uptake in technology or policy targets. The output from TIMES consists of a range of
prices for energy services, but also includes forecasts on investment requirements of the energy system. The investment costs are based on available technology catalogs from national and
international sources.
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Information on prices and quantities of energy services, fuel mix and investment profiles are
fed to the general equilibrium model, where they enter in the economic optimization decisions
for agents. The equilibrium model will also keep track on any public revenue or effects of
same.
In turn, the general equilibrium model sends information back to the TIMES model on demands for energy services given the new prices supplied. Then TIMES will recalculate the
energy system for the new energy service demands. This iterative procedure is repeated until a
satisfactory convergence is achieved.
The concept of energy services and the details on the model linking will be described in coming working papers.
The choice of a general equilibrium framework defines possible analyses
General equilibrium models reflect fundamental economic structures. This entails that the
models are specifically constructed to analyze long term changes in real terms in the economy, eg. production and consumption, from changes in economic policy or from changes in
other exogenous chocks to the economy. The model type cannot be used for evaluating short
term effects of economic policy or business cycles.
The analyses from IntERACT will be counterfactual analyses. They will evaluate what-if
questions. The IntERACT model will not be a tool for forecasting.
Choosing the TIMES framework ensures longevity
TIMES is an internationally accepted tool for modeling energy systems and the fundamentals
are developed under the auspices of the IEA Energy Technology Systems Analysis Program
(ETSAP).2 It is a tool that standardizes the modeling where a developer inputs data and
knowledge of specific energy systems. The tool has been used for national and international
energy system modeling in 70 countries and by 250 institutions.
TIMES is based on linear optimization that describes the most cost effective energy system
measured by total system cost in relation the existing energy system. TIMES describes both
production, supply and use of energy, as well as which resources the energy system requires,
eg. in the form of investments in new capital. Furthermore, TIMES can also track environmental effects from energy production.
TIMES is a versatile modeling tool that can be adapted to a high degree to the Danish energy
system. This includes any regulatory restrictions and rigidities in choice of technologies. The
energy system is described using a linked modular framework that can be expanded as necessary. For the TIMES-DK development the focus is initially on energy production and household demand for energy. At a later stage energy use will be expanded to industry and other areas.
2
See http://www.iea-etsap.org or for a longer introduction see:
http://www.iea-etsap.org/web/Docs/TIMESDoc-Intro.pdf
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TIMES will relatively easily be able to evaluate policy effects on the energy system such as
larger share of wind or biogas in electricity production; or tightening of the building code.
Model development is incremental
IntERACT is developed gradually and incrementally in order to shed light and understand
specific issues when linking the two types of models. For example how investment decisions
in energy production is affected or linking issues with respect to capturing second order effects in the general equilibrium model.
By starting from incremental development of the model we can investigate more than one aspect in parallel which have been decided to be incorporated in IntERACT. This enables us to
cooperate with other stakeholders to discuss and tap into available expertise. The incremental
approach also strengthens knowledge building, finding errata and generally gaining experience reducing the overall risk of the project.
IntERACT will be a supplement to the toolbox of analytical tools
General equilibrium models have strengths and weaknesses. The decision to use a general
equilibrium framework opens for a new range of policy impact analyses of long term effects
of policy changes of today and in the future. However, the choice of model type also set significant restrictions on the analytical possibilities.
IntERACT has the special strength that it combines consistent macroeconomic modeling with
a detailed and technical description of the energy system, as well as a description of the link
between economy and energy system. IntERACT will be a strong tool to supplement the
analyses of the economy wide effects of an ambitious climate and energy policy.
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