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The Price of Policy Risk Empirical Insights from Choice Experiments with European Solar Energy Project Developers
Sonja Lthi, University of St.Gallen, Institute for Economy and the Environment, ++41-71-2242330, sonja.luethi@unisg.ch
Overview
Successfully making the transition to renewable energy is high on the policy agenda in many countries around the world, and one technology that has particular potential for contributing to a future low-carbon energy supply is solar photovoltaics (PV). Given the current cost of PV, market diffusion crucially depends on policy incentives such as feed-in tariffs, which have been implemented in a number of countries. Feed-in tariffs have been praised for their effectiveness but also received mixed reviews when it comes to assessing their efficiency. A key empirical puzzle is why similar feed-in tariffs lead to differing outcomes (in terms of newly installed solar capacity) in different countries. Previous research suggests that answering this question requires a better understanding of policy risk, rather than just the level of return (e.g. the level of a feed-in tariff). This study contributes to this literature by conducting choice experiments to empirically examining the influence of certain aspects of policy risk on the decision of a PV project developer to invest in a given country. Based on an original data set of 1575 choice decisions by 63 PV project developers in Europe, this paper demonstrates that investors are particularly sensitive to the duration of the administrative process to actually get permission to build a solar project, and quantifies the survey results in terms of investors' willingness-to-accept certain policy risks.
Methods
The study applies a multi-stage methodological approach. In the first step, qualitative expert interviews ADDIN EN.CITE Flick19954343436Flick, U.Qualitative Research. Theories, Methods, Applications in Psychology and Social Sciences (Qualitative Sozialforschung. Theorien, Methoden, Anwendungen in Psychologie und Sozialwissenschaften)1995Reinbeck/HamburgRowholt(Flick, 1995) were conducted to explore solar project developers policy preferences. In the second step, the importance of the most relevant policy attributes was assessed through an online survey using Adaptive Conjoint Analysis (ACA) ADDIN EN.CITE Hartmann200251515117Hartmann, A. and Sattler, H.Wie robust sind Methoden zur Prferenzmessung?Research Papers on Marketing and Retailing, University of HamburgResearch Papers on Marketing and Retailing, University of HamburgNo. 0042002May 2002ISSN 1618-8985(Hartmann, 2002). Choice experiments are widely used in marketing research and have recently become increasingly popular in environmental and resource economics because they allow for modeling of realistic trade-off situations while avoiding some of the pitfalls of social desirability bias. This methodological approach is novel in that ACA is used to investigate investor choices among policies. The online survey has been conducted in October-November 2008. The solar project developers were invited to participate in the survey by phone and/or e-mail, at a solar fair, by an article on the internet and a flyer in a solar journal. The final data set includes 1575 choice decisions by 63 project developers.
Results
Among the five attributes of solar policies included in our choice experiments, the two factors showing the highest influence on investment decisions are the duration of the administrative process with 26% and the level of the feed-in tariff (24%). Two other factors are of medium importance, namely the existence of a cap and the number of unexpected solar energy policy changes with 19% and 18% respectively. The lowest importance (14%) is attributed to the duration of the feed-in tariff.
By converting normalized part-worth utilities into solar project developers' implicit willingness-to-accept certain policy risks, the data shows that for every half-year increase in the duration of the administrative process, a government has to pay investors a premium of about 4 ct/kWh (all else being equal). With regard to the existence of a cap, the choice experiments included three attribute levels, being no cap, a cap that is going to be reached in 4 years (loose cap), and a cap that is going to be reached in 1 year (tight cap). The analysis shows that removing a loose (tight) cap will allow governments to attract the same level of investment at a feed-in tariff that is about 5 (10) ct/kWh lower.
Conclusions
The analysis is the first that uses choice experiments to investigate investor preferences for specific attributes of PV policies. By surveying a high quality sample of active European PV project developers and carefully designing the experimental setting, this surey has created a robust data set that allows to draw very specific implications for policy makers. The key finding is that risk matters in PV policy design, and that a price tag can be attached to specific policy risks. Governments can build on our empirical results to design policies that will be effective in attracting private PV investment while at the same time maintaining efficiency by providing an adequate compensation for policy risk. In particular, policy makers should be aware that long administrative processes and, to a somewhat lesser extent, policy risks related to the existence of a cap and a substantial number of unexpected policy changes, have a cost attached to it that will need to be reflected in a higher level of the feed-in tariff to attract solar project developers.
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