Renewable Energy Investments: The Role of Stable Government
Solar, wind, hydro and biotechnologies are energy alternatives to fossil fuels that are capable of reducing global Greenhouse Gas (GHG) emissions. Renewable energy firms make capital expenditure decisions based on jurisdictional demand and a sufficiently attractive rate of return on investment. However, policy uncertainty can complicate investment decisions. New research by Ivey professor Guy Holburn examines how the relationships between energy firms, government agencies and politicians can affect the level of regulatory risk that firms contend with. To overcome uncertainty, Holburn found that firms should understand and manage political pressures on regulatory decisions.
Research
In the Energy Policy journal, Holburn’s work develops strategies for firms to assess renewable energy policy and manage potential risks attributed to changing governmental policy structures and relationships with stakeholders. To understand how legislation affects investment decisions, he examines regulatory regimes in two of North America’s largest jurisdictions that were early adopters of significant commitments to renewable energy: Texas and Ontario. Texas committed to renewable energy policy and insulated targets from short-term political influence by embedding renewable energy policy into legislation. Meanwhile, Ontario has a distinctively different approach that depended on Ministerial directives to agencies to establish capacity targets and tariffs for renewable energy in the province.
Holburn finds that Ontario’s regime has seen repeated changes to the direction and pace of renewable energy policy since 2003. In Texas, however, his research identifies 25 unsuccessful attempts by stakeholders to modify renewable energy policy, leaving the state’s renewable capacity targets in place. ‘Hard-wired’ policy delineated by legislation in Texas encouraged renewable energy investments that in total have surpassed the state’s 2015 targets. Ontario on the other hand, barely reached 50% of its 2007 targets for renewables by 2010. Holburn concludes that Ontario’s policy making environment, which authorizes Ministers to determine and revise renewable energy policy without a system of checks and balances, creates a high level of regulatory risk for firms. By contrast, the approach adopted by Texas encourages investment with results that speak for themselves.
Implications
Energy firms developing strategies for large-scale renewable energy investments consider the regulatory risks of jurisdictions before entering new markets. Holburn’s research suggests that governments aiming to attract such firms should embed key elements of renewable energy policy in legislation, creating a more certain regulatory environment. ‘Hard-wiring’ policies in legislation makes them more difficult to subsequently modify, encouraging investment in long-term, sunk renewable assets and energy infrastructure.
References
Holburn, G. (2012). “Assessing and managing regulatory risk in renewable energy: Contrasts between Canada and the United States.” Energy Policy. Volume 45 (1): pages 654-665.