Low-carbon transition: Private sector investment in renewable energy projects in developing countries

Abstract

• Dependence on fossil fuel reduces the hazard of private sector investment in renewable energy sector. • The role of fossil fuel dependence decreases in countries with prior investment projects. • Changes in oil price have competing effects on investment hazard. • Regulatory quality and renewable energy policies stimulate private sector investments in developing countries. Given the rapid population growth and subsequent increase in energy demand in developing countries, private sector investment in renewable energy projects is key for sustainable economic development. However, the current energy mix is still dependent on conventional fossil fuels. The paper examines the time duration to private sector investment in renewable energy projects and how the hazard rate is affected by dependence on fossil fuels. Using data on private sector participation in renewable energy projects in 134 developing and middle-income countries for the (1990–2012) period, this paper applies multiple failure time model. The results show significant negative effects of fossil fuel consumption and fuel rent on investment likelihood. Consistent with literature, a set of socio-economic variables, such as renewable energy policy and energy security concerns, play an important role in increasing the likelihood of private sector investment in renewable energy technologies. The findings of the paper resonate with concerns of the international community regarding the effect of fossil fuel dependence on the rate of adoption of renewable energy sources in developing countries.