When and how to support renewables?—Letting the data speak

Abstract

Low-carbon energy technologies are pivotal for decarbonising our economies up to 2050 and being able to at the same time ensure secure and affordable energy supplies. Consequently, innovation that reduces the cost of low-carbon energy sources would play an important role in reducing the cost of the transition. In this paper we want to assess the two most prominent innovation policy instruments (i) public research, development and demonstration (RD&D) subsidies and (ii) public deployment policies. Using a Lasso-regression we are able to select a model that is best able to perform in-sample predictions of patenting behaviour and international competitiveness in 28 OECD countries over 20 years. This approach allows including two dozen variables as well as a wide range of lags of the variables and interactions between them—in total some 47,000 variables. Our results indicate that both deployment and RD&D coincide with increasing knowledge generation and improving competitiveness of renewable energy technologies. According to our estimates, if Germany had invested one standard deviation more in deployment and RD&D support for wind technology than it actually did from 2000 on, the number of German wind patents would have been 166% higher in 2009. If it only increased deployment the number of patents would have been 20% higher and if it only increased RD&D the number of patents would have been 122% higher. This indicates two things. First, both support schemes together have a higher effect than the two individually. And second, RD&D support is unsurprisingly more effective in driving patents. Thereby, timing matters. Current wind deployment based on past wind RD&D spending coincides best with wind patenting. If we look into competitiveness we find a similar picture. A hypothetical increase in German deployment and RD&D support for wind technology by one standard deviation from 2000 on would according to our estimates, coincide with an improvement from 8th to 7th position in terms of revealed comparative advantage of German wind turbines on the world market. Thereby, the largest effect comes from deployment. Finally, we find significant cross-border effects, especially for wind deployment. Increasing deployment in one country coincides with increasing patenting in near-by countries. Based on the above-presented findings we argue that both deployment and RD&D support are needed to create innovation in renewable energy technologies. However, we worry that current support is unbalanced. Public spending on deployment has been two orders of magnitude larger (in 2010 about 48 bn Euro in the five largest EU countries in 2010) than spending on RD&D support (about 315 mn Euro). Consequently, basing the policy mix more on empirical evidence could increase the efficiency of innovation policy targeted towards renewable energy technologies.