Institutional and macroeconomic stability mediate the effect of auctions on renewable energy capacity

Abstract

Renewable energy (RE) auctions have become an increasingly popular policy instrument for decarbonizing the global energy matrix, and have been rapidly adopted by several countries worldwide. Previous research has used data from higher-income countries and two-way fixed effects models to estimate the impact of auctions on RE capacity, mostly with favorable results. However, these studies did not account for heterogeneous treatment effects across units to explore whether auctions are also effective in countries with unstable business environments. We analyze whether auctions also foster RE in countries experiencing macroeconomic instability or poor institutional quality. For this purpose, this study has drawn from multiple publicly available databases to build a dataset comprising 98 countries from 2000 to 2020. Our definition of RE includes solar, wind, and biomass sources. We first cluster countries by the quality of their business environment and then perform a differences-in-differences analysis considering staggered treatment adoption. We find that auctions positively affect RE capacity, yet the average treatment effects are higher for countries with better business environments. Thus, governments should exercise caution in adopting this instrument, especially in countries that experience macroeconomic or institutional instability. At the same time, dynamic treatment effects suggest that the policy needs time to show results.