Fiscal and financial incentives
First of all, our results highlight the effectiveness of FIT to spur capacity additions which directly impact the risk and return structure of RE projects as a policy instrument that guarantees a certain return on investment and provides an incentive for investors. FIT have been implemented in a range of countries, starting with Germany and Austria in 2000. The aggregated results (Multiple RE) as well as wind and solar sector results revealed a highly significant positive coefficient. However, the effect differs across sectors. Whereas in the solar sector FIT has a stronger impact than overall, FIT is less effective in the wind sector.
FITs proved particularly successful in countries such as Germany and Italy with some exceptions in other countries (e.g. Spain) (Bolkesj0 et al., 2014; Couture & Gagnon, 2010; del Rm & Bleda, 2012; Jenner et al., 2013; Lesser & Su, 2008; Mitchell et al., 2006). This instrument is a strong signal to investors as it addresses the capital market restrictions by adjusting the risk/return structure (Cardenas-Rodriguez et al., 2013). Thus our research is in line with evidence by Rfo and Bleda (2012) who underline the superiority of FITs to spur deployment and to lower risks associated with RE technologies. In addition our research confirms that a variety of policies consisting of specific and technology-neutral measures spur RE technology deployment.
Second, our results show that grants and subsidies prove to be effective as short term measures to alleviate finance constraints. This holds true for the solar and biomass sectors. Grants and subsidies temporally reduce the cost of finance for a project, and directly depend on a public budget (Johnstone et al., 2010a) which makes them more unstable than for example FIT. This is shown by our results of the solar sector. Institutional investors exhibit a preference of FIT over subsidies. With this analysis we confirm earlier work, that highlighted this type of support instrument can also contribute during the diffusion stages of the innovation cycle (Bergek et al., 2013a; Bolkesj0 et al., 2014; Olmos et al., 2012).
Third, we provide evidence for the effectiveness of loans and loan guarantee programs. According to our results this type of instrument does not spur the deployment in the solar sector. This stands in contrast to prior literature which showed that loans and loan guarantees could enhance institutional investors ability to refinance by reducing cost of capital (Bergek et al., 2013a; De Jager et al., 2008, 2011)
Our research regarding tax-based measures revealed mixed evidence. On the one hand aggregated results point towards a negative effect of taxes on subsequent capacity additions in renewables; however results from the solar sector reveal a positive impact. On the other hand, tax reductions tend to increase overall capacity in renewables, with no particular effect in the sectors. We therefore confirm earlier research that pointed towards an ambivalent nature of taxes as they depend on public budgets (Barradale, 2010; Cansino et al., 2010; Quirion, 2010).
Above all we confirm (Marques & Fuinhas, 2012a) who found that fiscal and financial incentives are conducive to increasing the share of RE. We extend their results by decomposing the indicator into distinct policy measures. On the other hand, we contrast and extend Aguirre and Ibikunle (2014) who found a negative effect of fiscal and financial incentives. We disentangle this view, showing that FIT and grants and subsidies can have positive effects; however, we do find a negative effect for taxes.
Institutional investors’ decisions are supported through direct influence on their return side of their investment calculations. Higher income through grants and subsidies and lower capital costs through FITs support their openness towards RE investments (Luthi & Wustenhagen, 2012b). Tax regulation does not necessarily have conducive effects as many institutional investors already have a tax optimised corporate structure.