Theoretical background

Public policy influence on renewable energy deployment

Literature on energy policy has analysed the relationship between policy and RE deployment in a number of different ways, generating evidence for policy makers to support their decisions (Delmas & Montes-Sancho, 2011; Harmelink, Voogt, & Cremer, 2006; Jacobsson et al., 2009; Menz & Vachon, 2006). Fundamental questions such as influence of price or quantity-based mechanisms have been addressed (Menanteau, Finon, & Lamy, 2003). Prior research thus provides a differentiated picture to support RE deployment.

First of all, fiscal and financial incentives can be provided to accelerate the development of RE projects. A number of scholars (Bolkesj0 et al., 2014; Couture & Gagnon, 2010; De Jager et al., 2011; del Rfo & Bleda, 2012; Jenner, Groba, & Indvik, 2013; Lesser & Su, 2008; Mitchell, Bauknecht, & Connor, 2006) underline the superiority of feed-in tariffs (FIT) to spur deployment and technological diversity and lower risks for private actors associated with RE technologies. These analyses hold when comparing FIT with other remuneration models such as quotas or auction-based systems (Butler & Neuhoff, 2008; Mitchell et al., 2006).

To provide short term fiscal relief for RE projects grants and subsidies can be provided to investors to reduce their overall cost for the projects (Bergek et al., 2013a; De Jager et al., 2011; Olmos et al., 2012). Similarly, government loans or loan guarantees could be of interest to private actors as the ability to refinance their activities is crucial for a long-term commitment in RE (Bergek et al., 2013a; De Jager et al., 2008, 2011). A growing stream of literature has further analysed the impact of tax-based incentives to spur RE deployment (Barradale, 2010; Bird et al., 2005; Cansino, Pablo-Romero, Roman, & Yniguez, 2010; Quirion, 2010). However, Barradale (2010) highlights the missing policy commitment (due to direct dependency on the public budget) as a main shortcoming of taxes and rebates.

Second, scholars argue that in the sense of carbon and energy market liberalisation preference should be given to market-based instruments as first best solutions, e.g. carbon cap and trading systems (Helm, 2002; Rogge & Hoffmann, 2010; Rogge, Schneider, & Hoffmann, 2011; S. Smith & Swierzbinski, 2007). Another market-based system, i.e. the tradability of RE certificates (green certificates) might further spur the deployment of renewables (Jensen & Skytte, 2002; Szabo & Jager-Waldau, 2008).

Third, policy makers have the option to provide funds to local authorities to be spent on RE deployment (i.e. funds to subnational governments) (Bird et al., 2005; De Jager et al., 2008; Menz & Vachon, 2006; Ragwitz et al., 2008) or directly invest in complementary assets such as infrastructure (De Jager et al., 2008, 2011; Henriot, 2013; Steinbach, 2013).

In addition, investment decisions can be related to policy instruments that do not directly impact the risk and return structure of RE projects. For example, the perception of investment opportunities and preference for short term or long-term incentives also influence the decision to invest (Masini & Menichetti, 2012). Prior literature has found that the creation of the surrounding institutions is a major driver to facilitate investments in RE technologies (Bergek et al., 2013a; Wustenhagen & Menichetti, 2012). This could be accompanied by a long-term strategic framework which is further valued by institutional investors as they prefer stability in cash flows over the duration of their investments (De Jager et al., 2008, 2011; Luthi & Wustenhagen, 2012b), thus foreseeable changes to regulations and policy consistency are paramount (W. White, Lunnan, Nybakk, & Kulisic, 2013).

Finally, regulatory measures to stimulate markets need to be established even though diffusion and application of RE technologies is socially and politically desirable (Jefferson, 2008). Furthermore, the highly regulated environment for diffusion of mature REs might require new forms of regulation compared to the commercialisation of RE in order to overcome market failures and dissolve path dependencies. Research has on the one hand highlighted mixed effects of renewable portfolio standards (RPS) for the US (Delmas & Montes-Sancho, 2011; Carley, 2009; Bird et al., 2005). Carley (2009), Bird et al. (2005), and Menz & Vachon (2006) show that RPS systems increase the share of RE produced but not the absolute amount, whereas Delmas and Montes-Sancho (2011) do not find a significant effect on RE capacity. On the other hand, further mandatory requirements, quota, and obligation schemes do exhibit a positive influence on RE application (Menz & Vachon, 2006), however, they have proven inferior to other instruments such as FIT (Butler & Neuhoff, 2008; De Jager et al., 2008, 2011; Mitchell et al., 2006).

One solution to address the problems encountered so far, apparently, is a ‘policy mix’ consisting of complementary instruments. However, no scholarly consensus exists on what the optimal policy mix could look like (Foxon & Pearson, 2007) or on which criteria should be applied to determine it (Carley, 2009). For example, Del Rio and Bleda (2012) argue that a variety of policies, consisting of technology-specific and technology-neutral measures is needed to enhance deployment of mature technologies. Relatedly, the question arises, if there is one optimal policy mix or several ones, contingent on different other factors?

Following this question scholars applied quantitative statistical methods (i.e. panel data analysis on country level) to investigate policy impacts on RE deployment. For example, Johnstone et al. (2010a) found that market based approaches favour technologies that are close to be technologically and cost wise competitive with fossil fuels (such as wind) whereas feed-in tariffs are conducive to innovation in less mature technologies (such as solar). On the other hand, Popp et al. (2011) do not find a significant effect of either FIT or a renewable certificate system on wind power investments.

Building on this work, scholars tried to uncover the influence of a number of different policy instruments on the contribution of renewables to the total energy supply (Marques & Fuinhas, 2012a). They show that aggregated measures such as fiscal and financial incentives (including FIT) as well as measures, that seek to define strategies and outline specific programs to promote these RE sources, have a positive significant impact. Controlling for a range of political (such as energy security and Kyoto protocol ratification) and socio-economic factors (e.g. prices for fossil-fuels, welfare etc.). Aguirre and Ibikunle (2014) found no significant positive influence of policies on RE growth, however they found a negative contribution of fiscal and financial incentives (i.e. taxes).

In sum, the literature has been searching for an integral overview of sustainable energy policy to spur RE diffusion. Given the mixed results of prior findings, we add to this debate through our research which aims at uncovering the effectiveness of different disaggregated policy instruments to induce private finance in RE assets. More specifically, we contribute to two different discussions: The FIT versus other support scheme debate, and the overall assessment of different support mechanisms for RE.

Beyond economic, regulatory and behavioural barriers, institutional factors such as acceptance among the local communities hinder the deployment of RE technologies (Arabatzis & Myronidis, 2011; Tampakis, Tsantopoulos, Arabatzis, & Rerras, 2013; Wustenhagen, Wolsink, & Burer, 2007). With our analysis we contribute to the private sector perspective on RE investments, leaving aside potential negative externalities caused by technologies deployed (Friebe et al., 2014).

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