Effects of Regulatory Framework on Investment in Renewable Energy

Abstract

Renewable energy policy is a key factor in promoting investments in renewable energy. The extant literature explores how traditional renewable energy policies like Feed-in-tariffs, net metering, Renewable portfolio standards, taxes, subsidies and public investments promote overall investments in renewable energy in general and renewable electricity in particular. However, these policies were designed during an era when renewable electricity had not attained grid parity, and comprised a small percentage of the total electricity share. In recent years, renewable electricity has attained grid parity in many countries of the world, and some technologies have become the cheapest sources of electricity. These renewable electricity technologies now form a significant share of the total electricity generation in several countries. This has led to the formulation and adoption of new regulatory instruments with features that can make it possible to integrate larger amounts of variable renewable electricity into the national grid, while expanding the absolute amount of renewables in the electricity generation fleet. This research is aimed at exploring how these regulatory instruments contribute to increasing investments in renewable electricity capacity, increasing generation of renewable electricity, increasing the share of renewables in the total generation of electricity, and reducing idle capacity. The findings of the research can guide regulators with respect to designing and reviewing their renewable energy regulatory framework in an environment of changing electricity markets and technologies. The study analyzes the effects of some salient features and components of national renewable energy regulatory frameworks on investments in renewable electricity. These include regulations about Fixed tariff for small producers, Connection and cost allocation, Network usage and pricing, Renewable grid integration, Creditworthiness of utilities, Payment risk mitigation, Utility risk and monitoring, GHG emission coverage, Legal framework for renewable energy, Electricity targets and plans, Institutions and meeting targets, Renewable energy in generation and transmission plans, Resource data and siting, Financial and regulatory support, Electricity grid access for dispatch, and Auctions. Control variables and fixed effects are used, as indicated by the theory and extant literature. The study covers panel data of 126 countries, over the years 2010 to 2021. The research employs quantitative as well as qualitative analysis. At first, the effects of the regulatory instruments are analyzed in a global model, using Driscoll-Kraay xiii standard errors. Next, the effects are analyzed over regional subgroups, where the countries are divided into six geographical regions. Ridge regression is used in this case, to account for the data characteristics. Next, the nonlinear effects of the overall regulatory framework strength on technology wise investments is analyzed. The technologies included are solar PV, onshore wind and hydroelectricity. In this stage, panel threshold regression is employed. Lastly, qualitative analysis is employed by conducting expert interviews of 31 project developers, on their opinions of the effectiveness of the regulatory instruments to promote investments in renewables. In this case, the Problem Centered Interview technique is employed, following the stated preference approach. The results reveal that not all the regulatory instruments have a positive effect on investments, while the strength of the effectiveness vary. Therefore, it can be suggested that regulators can strengthen some features of the regulatory framework, while discarding others. Moreover, there is regional heterogeneity in the results. This indicates that different policy features are effective in different countries, and there should be no one-size-fits-all approach. It has also been revealed that the strength of the national regulatory framework has a nonlinear effect on investments in all three technologies, indicating that as the share of renewables increases in the electricity generation, it is more important to strengthen the regulatory support to increase investments. Lastly, the qualitative analysis has shown that investors and project developers have an overall optimistic view of the effectiveness of regulatory instruments, where investors with an international portfolio of projects are more optimistic than those who work within a single country only. These results indicate that promoting investments at the investor or project level does not necessarily increase the overall investments in the renewable energy sector in the long term. The quantitative analysis reveals that not all the regulatory instruments are effective, but investors or developers consider all instruments to be effective to some extent. Therefore, there is a mismatch between the stated and revealed preference. The findings of this research can inform regulators and policy makers to formulate renewable energy policy in the context of national energy and climate policy, and design a regulatory environment to optimize investments in the renewable electricity industry. The research is particularly relevant in this age of energy price volatility, national energy security issues, climate crises, energy technology revolution and sustainable development.