Renewable Energy Investments and Feed-in Tariffs: Firm-Level Evidence from Southeast Asia

ADBIWorkingPaperSeries RENEWABLEENERGYINVESTMENTSANDFEED-INTARIFFS:FIRM-LEVELEVIDENCEFROMSOUTHEASTASIA DinaAzhgaliyeva,HaiLe,ResiOngOlivares,andShuTian No.1400 July2023 AsianDevelopmentBankInstitute DinaAzhgaliyevaisaSeniorResearchFellowandHaiLeisaResearchAssociate,bothattheAsianDevelopmentBankInstitute,Tokyo,Japan.ResiOngOlivaresisaFinancialMarketAnalystandShuTianisaSeniorEconomist,bothattheEconomicResearchandRegionalCooperationDepartmentoftheAsianDevelopmentBank,Mandaluyong,Philippines. TheviewsexpressedinthispaperaretheviewsoftheauthoranddonotnecessarilyreflecttheviewsorpoliciesofADBI,ADB,itsBoardofDirectors,orthegovernmentstheyrepresent.ADBIdoesnotguaranteetheaccuracyofthedataincludedinthispaperandacceptsnoresponsibilityforanyconsequencesoftheiruse.TerminologyusedmaynotnecessarilybeconsistentwithADBofficialterms. Discussionpapersaresubjecttoformalrevisionandcorrectionbeforetheyarefinalizedandconsideredpublished. TheWorkingPaperseriesisacontinuationoftheformerlynamedDiscussionPaperseries;thenumberingofthepaperscontinuedwithoutinterruptionorchange.ADBI’sworkingpapersreflectinitialideasonatopicandarepostedonlinefordiscussion.Someworkingpapersmaydevelopintootherformsofpublication. TheAsianDevelopmentBankrefersto“China”asthePeople’sRepublicofChinaandto“Laos”astheLaoPeople’sDemocraticRepublic. Suggestedcitation: Azhgaliyeva,D.,H.Le,R.O.Olivares,andS.Tian.2023.RenewableEnergyInvestmentsandFeed-inTariffs:Firm-LevelEvidencefromSoutheastAsia.ADBIWorkingPaper1400.Tokyo:AsianDevelopmentBankInstitute.Available:https://doi.org/10.56506/VRNO2480 Pleasecontacttheauthorsforinformationaboutthispaper. Email:dazhgaliyeva@adbi.org,hvle@adbi.org,rolivares.consultant@adb.org,stian@adb.org AsianDevelopmentBankInstituteKasumigasekiBuilding,8thFloor3-2-5Kasumigaseki,Chiyoda-ku Tokyo100-6008,Japan Tel:+81-3-3593-5500 Fax:+81-3-3593-5571 URL:www.adbi.orgE-mail:info@adbi.org ©2023AsianDevelopmentBankInstitute Abstract Thisstudyexaminestheimpactoffeed-intariffs(FITs)onpromotinginvestmentsinrenewableenergy(RE)inSoutheastAsia.Usingauniqueannualfirm-leveldatasetfromsixSoutheastAsianeconomiesfrom2012to2021,wefindrobustevidencethatFITsinSoutheastAsianeconomiessubstantiallyboostfirms’investmentsinRE.Moreover,theimpactofFITsonREinvestmentsvariesacrossREtechnologies.WefindsignificantandpositiveimpactsofasolarFITonpromotinginvestmentsinRE,butsuchimpactsareinsignificantforFITsonotherREtechnologiesincludingwindandbiomass,geothermal,andhydrotechnologies.Further,theimpactofFITsonREinvestmentismorepronouncedamongyoungerandsmallerfirmsthaninolderandlargerfirms.OurempiricalevidencehasimplicationsforpolicymakersintailoringthedesignofnewFITstopromoteprivatesectorinvestmentsinRE. Keywords:renewableenergy,feed-intariff,greeninvestment,SoutheastAsia,firmlevel JELClassification:Q20,Q28,Q53,Q58,Q42,G32,G38 Contents 1.INTRODUCTION1 2.SAMPLECONSTRUCTION4 3.RESEARCHMETHODOLOGY6 3.1TheBaselineModel:ImpactbyRETechnology6 3.2InstrumentalVariable7 3.3InteractionModels:ImpactbyFirmCharacteristics8 3.4Feed-in-TariffRates8 4.EMPIRICALFINDINGS9 4.1BaselineRegressionResults:RenewableEnergyTechnology9 4.2TheImpactsofFITsonREInvestment:FirmCharacteristics11 4.3AlternativeforFeed-inTariffsVariable:FITRates12 5.ROBUSTNESSCHECKS13 5.1PlausiblyExogenousIV13 5.2InstrumentalVariableRegressionswithFixedEffects15 5.3LagofFeed-inTariffsasanAdditionalInstrumentVariable16 5.4UsingTotalEquitytoScaleRenewableEnergyInvestments16 6.CONCLUSIONSANDPOLICYRECOMMENDATIONS17 REFERENCES19 1.INTRODUCTION Despiteitsconsiderablerenewableenergy(RE)potential,theproductionandconsumptionoffossilfuelsstillconstitutesamajorproportionofSoutheastAsia’sprimaryenergyuse.Theheavyrelianceonfossilfuelshasexposedtheregiontoenvironmentaldestructionandclimatechangerisks.Tomitigatecarbondioxideemissionsinlinewiththeclimategoalsestablishedbythe2015ParisAgreement,andtoachievethenet-zeroemissiontargetspledgedbyindividualcountries,SoutheastAsianeconomieshavemadeeffortstoincreasetheirREsupply.TheAssociationofSoutheastAsianNations(ASEAN)CentreforEnergy(ACE2022)indicatesthatREaccountedfor18.8%ofASEAN’sprimaryenergysupplyin2020.By2025,REisexpectedtoaccountfor35%oftheregion’sinstalledcapacityand23%ofitsgeneratingcapacityforprimaryenergy. Tofacilitatethisenergytransitionintheregion,asignificantincreaseininvestmentsinREisrequired.AccordingtotheestimateofIRENAandACE(2022),theregionwillneedtomakeanannualinvestmentof$210billionthrough2050toattainthe1.5°CwarmingscenarioforSoutheastAsiainlinewiththeWorldEnergyTransitionsOutlooktargetofnet-zeroemissionsgloballyby2050.Theregion,however,haslimitedpublicresourcesandfiscalspace,whichhasbeenexacerbatedbysignificantCOVID-19-relatedexpenses.Therefore,theparticipationoftheprivatesectorinalleconomicsectorswillplayacrucialroleinacceleratingthedeploymentofRE.Asolidregulatoryenvironmentisrequiredtoincentivizeprivateinvestment. Feed-intariffsareamongthemosteffectivepoliciesinstimulatingthedevelopmentofREglobally(ACE2018).MostoftheliteratureagreesthatFITshavebeeneffectiveinencouragingi