What matters for private investment in renewable energy?

Abstract

ABSTRACT This paper examines the drivers of private investment in renewable energy by source of financing for 13 economies over the period 2008–2018, with a focus on a sub-panel of Asian economies. Sources of financing – asset finance, corporate research and development (R&D), public market, and venture capital and private equity – vary not only across years and renewable energy sources, but also across countries. Using a fixed effects panel model, this paper provides a first quantitative estimate of the effect of government renewable energy policies on private investment across different sources of financing, with four main findings. First, while government expenditure on R&D positively affects private investment from asset finance and corporate R&D, it is not the most important driver in terms of the magnitude of the elasticity. Second, feed-in tariffs have a particularly strong effect on stimulating renewable energy investment financed through public markets, with the findings particularly strong for the Asian sub-sample. Third, tax incentives have a mixed impact across sources of financing. Fourth, technology costs and energy prices have considerable effects on driving renewable energy investment from asset finance, with the impact notably more pronounced for the Asian sub-sample. Key policy insights To maximize the impact of government R&D, policies should aim to facilitate a smoother investment environment for the private sector in the areas of asset finance and corporate R&D. This could include targeted subsidies and tax relief measures. Enhanced FIT mechanisms should be developed, particularly in Asia, to leverage greater investment financed via publicly quoted markets. This could also include more favourable initial fiscal incentives and terms of agreement. Tax incentives should be used with caution. While tax incentives have a positive effect on investment in renewable energy overall, they may negatively affect investment financed by corporate R&D and venture capital and private equity, i.e. private financing sources that are crucial for technology R&D and manufacturing scale-up. Countries with lower regulatory quality may need to offer higher FIT rates for policies to be effective in attracting private investment.