Contrasting effects of electricity prices on retrofit and new-build installations of solar PV: Fukushima as a natural experiment

Abstract

This study examines the effects of financial incentives, particularly electricity prices, on residential solar photovoltaic (PV) system installations. We highlight the importance of a factor in the adoption of low-carbon building technologies that the literature has largely overlooked: the distinction between retrofit and new-build installations. To address the endogeneity of electricity prices, we use the 2011 Fukushima nuclear accident and the subsequent shutdown of nuclear power plants in Japan as a natural experiment that caused substantial, exogenous, and regionally varying increases in electricity generation costs and prices. Electricity prices have a statistically significant, positive effect on PV system installations for existing homes (with a mean elasticity of 1.6), but a statistically insignificant, much smaller effect for new-build homes. A policy implication of these contrasting responses is that the cost-effectiveness of financial incentive schemes for low-carbon building technologies can be improved if they are targeted more at retrofits. We also find a large downward bias (40%–60%) in the estimated effect of electricity prices if they are not instrumented with exogenous cost-shifters.