To What Extent Do Alternative Energy Sources Displace Coal and Oil in Electricity Generation? A Mean-Group Panel Analysis

Abstract

This paper determines by how much alternative electricity generation sources—natural gas, nuclear, hydro, and renewables—displace electricity generation from coal and oil. It does so by employing a first-difference model and a mean-group estimator applied to a panel that spans 1985–2019 for 27 high- and 13 middle-income countries. As such, our approach avoids/addresses several statistical issues common in long-macro panel analyses—heterogeneity, nonstationarity, and cross-sectional dependence—that have largely been ignored/unaddressed in previous displacement studies. Ultimately, we find that the displacement effect is small and only marginally significant for nuclear, and is significant though less than unity for natural gas and hydro, whereas intermittent renewables (solar and wind) have unitary displacement effect. These results suggest a substantially greater displacement potential for alternative generation sources than typically found by the previous literature. In other words, increasing hydro and wind and solar are all impactful ways to decarbonize the electricity system.