Regulation trumps economics? Examining renewable energy policy, diffusion and investment in 80 developing countries

Abstract

Renewable energy (RE) has received much attention for feeding the growing energy demand from developing countries without compromising the global efforts to combat climate change. For faster diffusion, countries seek substantial involvement by private firms in the RE diffusion process. In this paper, we show how different RE policy instruments influence private investments given the diffusion stages of developing countries and the origin of investment. Using the World Bank’s Private Participation in Infrastructure Database, we constructed a country-year panel of 80 developing countries for the period 1996–2016. We found that regulatory instruments such as obligation schemes are more effective than feed-in-tariffs in mobilizing private investment in developing countries, particularly in the formative diffusion stage. Further analysis demonstrates that obligation schemes mobilize foreign investment, while upfront cost recovery through grants and subsidies mobilize domestic investment. Moving from the formative to the growth stage, strategic planning also helps developing countries receive private investments, particularly for domestic sources. Multilateral support, prior knowledge, and economy-wide market stability in the host country are major factors for mobilization. In particular, foreign investment seeks a guarantee of continuous RE business operation, rather than government assistance on cost recovery. The results provide insights to developing country governments and international organizations with policy strategies to facilitate RE expansion in developing countries.