The trillion-dollar question is how to have the right incentives and conditions to attract investors, writes Geraldine An

Ang, Geraldine

LSE Research Online

What’s	holding	back	investment	and	innovation	inrenewable	energy?Renewable-energy	technologies	are	critically	important,	both	in	addressing	the	risks	of	climate	change	andachieving	Sustainable	Development	Goal	number	7	(SDG7,)	relative	to	affordable	and	clean	energy.	They	havealso	become	increasingly	cost-competitive:	the	capital	cost	of	utility-scale	solar	photovoltaic	(PV)	energy	hasfallen	by	more	than	60	per	cent	since	2010,	and	that	of	onshore	wind	energy	by	20	per	cent.There	is	no	shortage	of	capital	available	globally	to	finance	renewable-energy	projects.	The	financial	sectorencompasses	more	than	€100	trillion	of	assets.	So	how	is	it	that	investment	in	renewable	energy	is	not	flowingfaster?The	trillion-dollar	question	is	how	we	can	shift	incentives	and	strengthen	the	right	conditions	to	make	solar,	windand	other	renewable	power	more	attractive	to	investors.	To	respect	the	Paris	Agreement’s	goal	of	limitingtemperature	rise	to	well	below	2°C,	annual	investment	in	renewable	energy	needs	to	increase	by	150	per	centbetween	now	and	2050.New	OECD	research	shows	that	incoherent	policies,	misalignments	in	electricity	markets	and	cumbersome	andrisky	investment	conditions	are	among	the	main	factors	holding	back	investment	and	innovation	in	renewableenergy	in	advanced	and	emerging	countries.In	order	to	meet	renewable	energy	deployment	goals,	policy	makers	need	to	strengthen	investment	conditions,from	investment	policy	to	competition,	trade	and	financial	market	policy.	And	most	importantly,	specific	policyincentives	and	climate	policies	should	not	be	considered	in	isolation	from	the	broader	environment	for	investmentand	innovation	in	renewable	energy.Creating	a	supportive	framework	for	renewablesAt	the	policy	level,	scaling	up	investment	in	deployed	renewables	requires	designing	targeted	incentives	such	as:feed-in	tariffs	(i.e.	a	guaranteed	minimum	price	per	unit	of	renewable	power	generated);	renewable	energycertificates	(a	certificate	proving	that	one	unit	of	electricity	was	generated	from	a	renewables	source,	which	canbe	sold	separately	from	the	underlying	physical	electricity	associated	with	a	renewable-based	generation	source);and	public	tenders	(which	include	public	competitive	bidding	or	auctions	for	a	set	capacity	of	renewable	power).LSE Business Review: What’s holding back investment and innovation in renewable energy? Page 1 of 3		Date originally posted: 2017-07-21Permalink: http://blogs.lse.ac.uk/businessreview/2017/07/21/whats-holding-back-investment-and-innovation-in-renewable-energy/Blog homepage: http://blogs.lse.ac.uk/businessreview/Feed-in	tariffs	and	certificates	in	particular	have	driven	investment	in	advanced	countries,	leading,	for	example,	toan	11	per	cent	increase	in	renewables	investment	for	each	additional	unit	of	feed-in	tariff,	in	USD/KWh.	Auctionsand	tenders	have	supported	renewables	investment	in	emerging	markets	(OECD	analysis	shows	that,	historically,increasing	the	capacity	of	a	tender	by	1	MW	leads	to	a	0.1	per	cent	increase	in	renewables	investment	flows).Explicit	carbon	prices	(using	carbon	taxes	or	emissions	trading	schemes)	have	driven	investment	in	renewablesin	the	European	Union	and	in	emerging	economies,	and	across	OECD	and	G20	countries	in	solar	energy.	But	atthe	same	time,	pressure	from	fossil-fuel	subsidies	in	the	electricity	sector	has	also	deterred	renewablesinvestment	in	emerging	economies.Incompatible	incentives	are	worrying	on	a	number	of	fronts,	not	only	for	investment	in	deployed	renewables	butalso	innovation	in	earlier-stage	renewables	technologies.	An	example:	feed-in	tariffs	stimulate	renewable-energypatents,	yet	policy	across	OECD	countries	and	emerging	economies	has	been	shifting	away	from	FiTs	towardpublic	tenders,	to	adjust	to	changing	market	conditions,	control	the	deployment	of	large-scale	renewables,	andreduce	costs	for	consumers.Also,	government	spending	in	research,	development	and	demonstration	(RD&D)	for	low-carbon	technologies	isat	historic	lows.	This	has	negative	implications	for	innovation;	OECD	research	shows	that	public	RD&Dexpenditures	have	thus	far	played	an	important	role	in	stimulating	patenting	in	renewables	technologies.In	addition	to	aligning	our	incentives,	we	need	to	take	advantage	of	the	fact	that	some	climate	mitigation	policiesenhance	the	positive	effects	of	other	policies	when	they	are	combined.	For	example,	setting	carbon	prices	whileproviding	public	RD&D	spending	in	renewables	technologies	has	worked	well	for	mobilising	renewablesinvestment	in	emerging	markets.	In	OECD	countries,	Denmark	has	become	a	leader	in	renewables	technologies,including	by	providing	integrated,	sector-wide	policy	support	to	RD&D	and	deployment	of	renewables.Next,	we	have	to	make	the	investment	environment	in	renewable	energy	–	especially	solar	and	wind	energy	–	farmore	attractive,	and	also	make	it	easier	to	do	business,	with	improvements	in	the	following	areas:Investment	policy	and	investment	facilitation	(property	registration,	corruption	perception,	regulatory	quality,licensing	and	permitting	systems),Competition	and	trade	policy	(direct	control	of	the	state	over	enterprises,	ease	of	trading	across	borders)Financial	access	(access	to	domestic	credit	for	the	private	sector)Finally,	we	need	to	work	at	making	sure	that	the	broader	investment	environment	isn’t	at	odds	with	low-carboninvestment.	For	example,	the	implementation	of	Basel	III	banking	regulations	–	though	they	are	important	–	alsomay	have	had	the	unintended	consequence	of	constraining	access	to	debt	financing	for	capital-intensiverenewable	projects.	Investment	in	renewable	energy	and	other	low-carbon	technologies	needs	to	take	place	on	afar	greater	scale	if	we	are	to	achieve	the	ambition	of	the	Paris	Agreement	and	the	Sustainable	DevelopmentGoals.	Evidence-based	research	and	stakeholder	co-operation	are	needed	to	help	policy	makers	design	effectivepublic	policies	that	facilitate	the	transition	to	a	low-carbon	economy.	The	OECD	stands	ready	to	support	thesecritical	goals,	as	part	of	the	OECD	Centre	on	Green	Finance	and	Investment.♣♣♣Notes:This	blog	post	is	based	on	the	author’s	report	The	empirics	of	enabling	investment	and	innovation	inrenewable	energy,	co-authored	with	Dirk	Röttgers	and	Pralhad	Burli,	OECD	Environment	Working	Papers,No.	123,	May	2017.The	post	gives	the	views	of	its	authors,	not	the	position	of	LSE	Business	Review	or	the	London	School	ofEconomics.Featured	image	credit:	Solar	panels,	by	skeeze,	under	a	CC0	licenceWhen	you	leave	a	comment,	you’re	agreeing	to	our	Comment	Policy.LSE Business Review: What’s holding back investment and innovation in renewable energy? Page 2 of 3		Date originally posted: 2017-07-21Permalink: http://blogs.lse.ac.uk/businessreview/2017/07/21/whats-holding-back-investment-and-innovation-in-renewable-energy/Blog homepage: http://blogs.lse.ac.uk/businessreview/Geraldine	Ang	works	as	a	Policy	Analyst	and	Economist	on	green	finance	and	investment	andclimate	change	in	Paris	at	the	Organisation	for	Economic	Co-operation	and	Development	(OECD),which	she	joined	in	2011.	She	undertakes	research	and	policy	analysis	to	help	governments	fromadvanced,	emerging	and	developing	countries	mobilise	private	investment	in	green	infrastructure.She	has	co-authored	several	reports,	including:	The	empirics	of	enabling	investment	andinnovation	in	renewable	energy;	the	OECD	Business	and	Finance	Outlook	2016;	OvercomingBarriers	to	International	Investment	in	Clean	Energy;	the	Policy	Guidance	for	Investment	in	CleanEnergy	Infrastructure;	and	Mobilising	Private	Investment	in	Sustainable	Transport.	Geraldine	has	contributed	toseveral	high-level	events,	such	as	the	climate	conference	COP21	in	Paris	in	December	2015.	Previously,she	conducted	research	on	climate	economics	for	the	Earth	Institute,	and	consulted	for	the	US	Mission	to	the	UNat	the	United	Nations	Development	Programme	(UNDP).	She	also	served	as	Senior	Editor	of	ColumbiaUniversity’s	Journal	of	International	Affairs.	She	worked	for	three	years	as	an	Associate	Manager	for	LagardereActive	in	New	York	and	for	one	year	for	the	French	Senate.	Geraldine	holds	a	Master’s	of	Public	Administrationfrom	Columbia	University’s	School	of	International	and	Public	Affairs	(2011)	and	a	Master	in	Management	fromHEC	Paris	(2006).	LSE Business Review: What’s holding back investment and innovation in renewable energy? Page 3 of 3		Date originally posted: 2017-07-21Permalink: http://blogs.lse.ac.uk/businessreview/2017/07/21/whats-holding-back-investment-and-innovation-in-renewable-energy/Blog homepage: http://blogs.lse.ac.uk/businessreview/

What's holding back investment and innovation in renewable energy?

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