Conclusions and policy implications
This work contributes to two different streams of the academic literature: Exploring the effectiveness of RE policies as well as observing the role of policies in the decision making process for RE capacity investments through institutional investors. Our research revealed mixed evidence from the wind, solar and biomass sector. We call for technology specific policies, taking into account the actual market conditions and the position in the technology life cycle to design a supportive policy mix. Our results strongly suggest the establishment of a reliable framework with a clear vision and long-term policy objectives regarding the RE capacities to be installed in the future as well as complementary transitions in the energy sector. Ex-post changes to the remuneration of existing projects should be avoided. However, as technological progress continues, the measures taken need to be adjusted, taking the market and technological conditions (i.e. life cycle) into account.
Within this framework, monetary and fiscal and economic incentives are the most relevant policy measures for investors. These directly impact the risk/return profile of RE projects and, thus, their attractiveness. Investors are positive about long-term reliable support mechanisms that cannot be revoked and provide a highly predictable revenue stream. FIT provide more reliable and long-term signal than grants which depend on public budgets. However these funds influence the direct and early project cash flows, which is also seen favourable.
According to our results, market based incentives (such as GHG emission trading systems) can also have strong influence on investments by institutional investors. These measures support the need of investors for a highly reliable environment, best accompanied by a diminished risk exposure. However, for an emission trading system to become an effective anchor for institutional investors, the technology deployed should have reached maturity.
Supportive regulatory measures such as codes and standards (especially RPS) accelerate the diffusion process of RE technologies by further reducing technological and regulatory risk associated with investments in RE projects. Thus we recommend the streamlining and strengthening of legislation and a transparent setting of renewable energy targets.
Our results also provide implications for institutional RE investors who are looking for stable returns unrelated to volatile capital markets. They recognize a regulatory environment which supports their investments or lowers their risks. We suggest them to allocate their funds in countries which have shown to be long-term supporters of the RE markets and have not changed policies abruptly. Higher certainty in the reliability of RE technologies and increasing cost competitiveness make the market increasingly independent from direct support mechanisms. To accelerate the further diffusion the policy focus can move towards a reliable environment for RE.
There are a number of limitations regarding study design and modelling. First, the use of dummy variables for the policy measures does not allow for statements concerning policy implementation, policy design or policy uncertainty (Bergek et al., 2013a; Jenner et al., 2013; Luthi & Wustenhagen, 2012b; Muller et al., 2011). Second, our analysis does not cover the most recent developments in RE deployment and investments (2012 onwards) due to data availability.
Amending our fine grained policy analysis, future studies could look at the influence of these and other policies on general capacity additions among different types of private and institutional investors such as banks, insurances, university endowments, pension funds and family offices as well as including non-institutional investments such as households and utilities. Furthermore, interaction effects between the different policy instruments are worthwhile investigating in a longitudinal research design to discover complementarities and synergies. Geographically our research could be extended to the BRIC countries and less developed countries (LDC) which might alter the results due to an different institutional setting (Friebe et al., 2013, 2014). Finally, it would be interesting to close the link between early stage and later stage financing along the finance value chain for RE technologies, thus analysing the support environment for venture capital and private equity investments in the early and later stages of RE companies which might interact with RE project investments.
The authors are grateful for the time and support of Martin Kenney, Donald Patton (University of California, Davis), Alex Coad, and Paul Nightingale (SPRU - University of Sussex). We thank six anonymous reviewers for useful comments and suggestions. In addition the discussion at the ZEW Energy Conference 2014 helped us in further refining our arguments. We would like to thank the Federal Ministry of Education and Research (BMBF), Germany, for their financial support as part of the research project ‘‘Climate Change, Financial Markets and Innovation (CFI)’’.