The impact of subsidy retraction on European renewable energy investments

Abstract

Over the past few decades, renewable energy has received considerable public support through subsidies. However, its reliance on governments inherently induces policy uncertainty through the possibility of retroactive policy changes, i.e., ex post subsidy adjustments, which, in turn, impact private investors’ appetite for renewable energy investments. We empirically investigate the effect of retroactive policy changes on investment decisions by considering common support mechanisms in the EU for the period 2000–2017. To quantify the impact, we estimate a regression model utilizing a difference-in-difference approach, which allows us to identify the impact stemming from retroactive policy changes. The results show that a retroactive subsidy change decreases the investment rate by approximately 45% for PV and 16% for onshore wind. Hence, our results indicate that once the seed of mistrust is sown, it is likely to have a lasting impact. Consequently, our results suggest that a stable policy environment with credible policy commitments is crucial for incentivizing investments made by private firms. We find that that sudden unexpected policy changes deter further investment activity in affected countries suggesting that a stable policy environment is crucial to incentivize investments by private firms. This effect was greater for solar investments than onshore wind.