K. Fabrizio’s New Study Finds Regulatory Flip-Flops Undermine Clean Energy Investment

in Emerging Research, Energy & Environment Sector, Faculty, News, Strategy & Innovation
November 28th, 2012

“The Impact of Regulatory Uncertainty on Renewable Energy Investments,” forthcoming in the Journal of Law, Economics, and Organization

Policy uncertainty—whether concerning the impending “fiscal cliff” or potential carbon taxes—is blamed for reducing investment and restraining economic growth. Does the same logic apply to investment in renewable energy generation?

In a new study, Boston University School of Management’s Kira Fabrizio finds that uncertainty about future regulatory policies does indeed negatively influence firms’ investments in new clean energy assets. Fabrizio is an assistant professor in strategy & innovation, and her paper, “The Impact of Regulatory Uncertainty on Renewable Energy Investments,” is forthcoming in the Journal of Law, Economics, and Organization.

Fabrizio’s study focuses on the enactment of state-level Renewable Portfolio Standard (RPS) policies in the US electric utility industry. The policies are designed to encourage investment in renewable electricity generation by requiring utilities to procure a certain percentage of electricity from renewable generation. She finds that, on average, “RPS enactment in a state did generate an increase in investment in new renewable generating assets, but investment increased significantly less in states with a history of regulatory reversal,” a mark of an uncertain policy environment.

With important implications for policy makers, the study suggests that government renewable-energy policy initiatives, when launched in less stable regulatory environments, 1) lead firms to perceive new investment in clean energy projects and assets as more risky, and 2) ultimately create fewer new investments in renewable generation assets, undermining the purpose of the policy.

Fabrizio’s research highlights the importance of regulators’ commitment to policy stability and predictability. Her study holds implications not just for renewable energy investment but other initiatives such as carbon tax/abatement policies, where long-lived investments depend on policies subject to future modification.

The study also touches on strategies for enhancing the credibility of RPS regulatory efforts and their perceived stability, thus reducing the apparent risk of renewable energy investment. These include:

  • Regulatory support for investments dependent on renewable energy policies and requirements, whereby regulated utilities could recover the costs of investments in their rates if the value of these investments falls due to policy reversals.
  • Adoption of requirements and procedures making the repeal or renegotiation of RPS policies more arduous.

Whatever strategies regulatory agencies undertake, Fabrizio urges, “Until policy makers are able to enact legislation and credibly commit to maintaining the policy they adopt, firms will be less willing to invest in developing and adopting new technologies.”

Banner image courtesy of flickr user daBinsi