A good question, and easy to see the answer in my Volvo Service Manual Wiring Diagrams (have one for 1985, and 1987-88, so 1986 will be the same).

The fat red wire, as already mentioned, carries the heavy charging current to the battery, It goes to the starter, and the current goes on to the battery via the very fat red wire to the positive battery terminal.

That fat wire is one of the three inside the harness that wraps below the front crankshaft pulley. That location is very wire-unfriendly. Heat, vibrations, oily stuff, road grit, and the 1983-88 crumbling insulation problem on the two thin wires in there.

The thin wires go to that notorious gray connector on the firewall. Black from the oil pressure sensor, red from the alternator.

That harness is held up to the engine by bendable metal tabs that start life with plastic protector stuff on their tips. That stuff disappears over time and that leaves the bare metal tabs to chafe into the harness cover, sometimes into the wires. If the two thin wires get compromised, you get odd but not life-threatening problems. If it gets into the fat one, you get a fire. A 500 amp short - like an arc welder. Seldom happens as that insulation is really tough.

Here's what that thin red wire does. When the key is in Position III, engine not running, battery voltage to the warning lights goes through the battery light, into that thin red wire, and into the alternator rotor windings. From there, it goes to ground, completing the circuit so the warning lights come on.

That small voltage (exciter voltage) on the rotor provides a small magnetic field, too. When the alternator begins to spin, that field rotates and creates voltage in the stator windings. When that voltage gets high enough the alternator becomes "self-exciting". The voltage at the red wire becomes positive - it is no longer a negative ground, so the warning lights go off (oil light is a separate deal).

So if that thin red wire is not properly connected, things won't work. If it touches a ground somewhere "illegal" (as inside a compromised harness) the battery light comes on any time, maybe flickers in time with revving the engine (moves the harness). If it touches nothing, the alternator may not make any charge at all.

One fix used by many bricksters is to run a whole new wire. Begin at the gray connector, route it along the firewall, down the fender, over to the alternator. Leave a lot of slack to allow for engine movement. Use the wire terminal from the one in the gray connector, it's an odd one. (Also used on parking light connectors in 1982 or older 240s DAMHIK). The gray connector can be removed from the firewall and opened, there are tiny hinges.

This seems a long post, but I feel that once a DIY guy/gal has a grasp of the "why", the "how" of repairs get simpler.

Good Luck,

Bob

:>)