Do economic instruments matter? Wind turbine investments in the EU(15)

doi:10.1016/j.eneco.2008.02.005

Energy Economics

Volume 30, Issue 6, November 2008, Pages 2980-2991

https://doi.org/10.1016/j.eneco.2008.02.005 Get rights and content

Abstract

This paper analyses how governments in the EU(15) countries have succeeded in stimulating investments in wind turbines between 1985 and 2005. I use four different evaluation criteria (Tobin's Q, Euler equation estimation, investment accelerator model, and the effective marginal tax rate) to describe the observed investment patterns. After a period of rapid growth in capital stock (1985–2000), a period of modest growth (2001–2005) can be observed even though the economic attractiveness of investing increases modestly. This pattern cannot be explained by the evaluation criteria unless we accept economic attractiveness is a necessary condition and not a necessary and sufficient condition. When analysing which policy has worked best, the policies of Germany, Denmark and Spain stand out. Their early and consistent support has been based on feed-in tariffs combined with subsidies.

Introduction

Suppose a government wants the private sector to provide a good or service, whilst it is not financially attractive for an individual company to do so. Though much has been written on the coercive and non-coercive measures a government may use in theory (e.g., Palmer and Burtraw (2005), or Graham and Williams (2003)), little is known about the effect of these measures in practice. Poor data quality and availability are probably the most important reasons for empirical studies to appear in small numbers only. The results of the majority of those papers, however, need not apply to private sector investments in non-competitive markets, as renewables. In the absence of additional incentives, investments in renewables do not pay off for the private sector. That problem need not be comparable with the analysis of governments stimulating certain types of companies (small or medium-sized, or multinational companies) in competitive markets (see, e.g., the overview paper by Klette et al. (2000)). Nor need the analysis be comparable with governments stimulating certain activities (e.g., R&D) in competitive markets (see for example, Bronzini and de Blasio (2006)).

In the absence of a sound knowledge of how the private sector responds to investment incentives in non-competitive markets, it is thus unclear how much incentives should be given before the private sector will invest. ¹ As a consequence, governments may either overspend on incentives (resulting in excessive returns to the investors) or provide such a mediocre incentive programme that the investment targets will never be met. The purpose of the current paper is to investigate how a government may evaluate an investment incentive structure in a scarce data setting, rather than fine tuning extant evaluation criteria on these investment models. In this paper, I explore how various evaluation criteria can be used to explain the observed investment pattern. The legislation and data focus on the measures taken by the EU(15) governments during the 1985–2005 period for encouraging wind power investments. Using a structural investment model, and a hypothetical investment in a 1 MW wind power plant, I evaluate the attractiveness of the various incentive scheme by means of four criteria: Tobin's Q, the Euler equation, an investment accelerator model, and the effective marginal tax rate (EMTR).

In Section 3, I explore two questions: (1) What model describes the wind power investments best (Section 3.2), and (2) What policy has worked best in spurring investment (Section 3.3)?

The results of the regression analysis suggests that the sign of the slope estimators is in line with the theoretical expectations. This suggests that as long as government incentives are financially attractive to the entrepreneur, the mixture of policy instruments becomes irrelevant. When analysing the various countries individually, however, it seems that topics as policy persistence, and a mixture of both investment and production related incentives has triggered the largest investment levels in wind turbines so far.

Section snippets

Model

The economic analysis of government incentives to corporate investments is based on the neo-classical investment model by Hall and Jorgenson (1967). In that model, firms maximise the NPV of their investments, subject to a depreciation of their installed capital stock: $max_{{I_{t}, k_{t}}_{0}^{\infty}} V_{t}, s .t . : k_{t} = k_{t - 1} - δ k_{t - 1} .$

In this model, V_t is the NPV of investment I, k_t is the total capital stock installed in year t, and δ the rate of physical depreciation. The attractiveness of the model is that it offers an

Data

I have used IEA/OECD annual data on installed wind turbine capacity. Table 2 shows the associated net installed capacity figures (referred to as k_it in the equations) for some years in the sample. When analysing the various time series, a number of peculiarities are apparent. First, many countries did not have serious investment figures in the first few years of the time period considered. This implies the cross-section variation is limited, hampering sophisticated econometric analysis. Second,

Conclusions

In this paper, I have investigated how the private sector responds to investment incentives in non-competitive markets. I have focussed on government stimuli for corporate wind turbine investments in the EU(15) during the 1985–2005 period. The two questions addressed in this research have been: (1) Which economic model describes the investment response best, and (2) Which policy has worked best?

The first part of the paper outlines four economic evaluation criteria that may be used to explain

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^☆: I gratefully acknowledge the helpful comments of three anonymous referees and Richard Tol (the editor).

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Do economic instruments matter? Wind turbine investments in the EU(15)☆

Abstract

Introduction

Section snippets

Model

Data

Conclusions

Energy Policy

Journal of Urban Economics

Energy Policy

Energy Economics

Environment International

Energy Policy

Journal of Public Economics

Research Policy

Energy Economics

Energy Economics

Journal of Accounting and Economics

Energy Policy

Energy Policy

Dynamic Economics

Dynamic investment models and the firm's financial policy

Review of Economic Studies