Breaking down the barriers to clean energy trade and investment
What policy restrictions are in place on international clean energy trade and investment in clean energy? What should be done about these?
Investment in clean energy technologies such as solar photovoltaic (PV) cells and wind turbines needs to be scaled up in the coming decades to meet the global climate change challenge and achieve the broader development and economic agendas governments have set in motion. Over the last 10 years, policymakers have provided substantial support to clean energy, benefiting both domestic and international investment in the sector. However, since the 2008 global financial crisis the perceived potential of the clean energy sector to create local jobs has led several OECD countries and emerging economies to design green industrial policies aimed at protecting domestic manufacturers, notably through local content requirements (LCRs). Empirical evidence presented in a new OECD report, Overcoming Barriers to International Investment in Clean Energy (OECD, 2015; building on Bahar et al., 2013 [Ref 1]), shows that LCRs can hinder global trade and investment in solar PV and wind energy, distorting global value chains, therefore reducing the potential benefits from global commerce in this sector.
The increasing use of trade barriers such as local content requirements and trade remedies offers an example of policy incoherence in the context of climate change goals. Aligning trade and investment tools with climate change policy should be a priority for policymakers everywhere given the urgent need to support the transition to a low carbon energy system. The International Energy Agency (IEA) estimates that to be on course for a low carbon future, cumulative investments in low carbon energy supply and energy efficiency will need to reach US$53 trillion by 2035, only 10 percent more than the US$48 trillion that would likely be invested in any case in the energy sector under a business-as-usual scenario. Investing in clean energy also creates economic opportunities for developed and developing countries alike including, among others, facilitating cost effective access to decentralised energy in rural and remote areas; reducing local air pollution; and stimulating innovation and technology.
Supporting clean energy deployment
Investment in clean energy technologies in the electricity sector needs to be significantly scaled up in the coming years to reduce greenhouse gas emissions and ensure that an international goal of holding global warming below a two degree Celsius rise from pre-industrial levels is achieved. Annual investment in renewable energy technologies in the power sector will need to increase from US$270 billion in 2014 to US$400 billion in 2030 in order to stop global energy-related emissions from rising, according to the IEA. [Ref 2]
Nonetheless, recognising the role of clean energy in addressing climate change and fostering growth, policymakers have provided significant support to its deployment over the past couple of decades [Ref 3]. Globally renewable energy subsidies amounted to US$121 billion in 2013. As of early 2015, 145 countries had implemented specific renewable energy support policies at the national or sub-national level, up from 138 countries in 2013. These include fixed feed-in tariffs (FiTs) or premiums [Ref 4]; quotas and renewable portfolio standards [Ref 5]; and fiscal and financial support policies, including tax reductions, grants and low-interest loans. New investment in renewable energy generation and fuels increased six fold between 2004 and 2011, reaching US$279 billion in 2011. Investment declined in 2012-13 as a result of excess capacity, market consolidation, and policy uncertainty, before stabilising at US$270 billion in 2014, according to Bloomberg New Energy Finance (BNEF). Investors spent more than US$2 trillion on renewable energy plants in the past decade and last year added more renewable capacity than ever before, BNEF has also found. Solar and wind energy received the largest share of new investment flows at US$150 billion and US$100 billion respectively.
Renewable energy technologies have gone through significant price reductions, largely driven by market creating government incentives. The price of crystalline silicon (cSi) PV cells, for instance, has dropped by 80 percent since 2008 and by 99 percent since 1977. The levelised cost of electricity (LCOE) from solar PV has dropped below retail electricity prices (per-kWh charge) in many countries, according to the IEA, and is approaching grid-parity at the utility scale.
Trade and investment for deploying solar PV and wind energy
Until the global financial crisis, many countries supported clean energy through general investment liberalisation, and by entering into bilateral or regional free trade agreements. Governments generally did not discriminate between foreign and domestic investors and they refrained from imposing local content requirements. International trade and greenfield foreign direct investment (FDI) have strongly contributed to the growth of the solar and wind energy sectors, as well as their integration into global value chains. Both industries – and especially solar PV energy – have witnessed the emergence of global production networks.
International investment accounts for an important share of clean energy investment. Between 2004 and the first half of 2012 international investment represented about one-third of asset finance investment of utility scale clean energy projects. Trade in clean energy technologies also increased dramatically over this period. Between 2004 and 2011, global imports of wind powered generating sets – namely, wind turbines (HS 8502.31) – increased six fold. Global imports of solar PV cells and modules and light-emitting diodes – which are all covered by the same commodity code HS 8541.40 – also increased six fold. Since then imports of wind turbines have remained steady, at around US$6 billion a year, but imports of solar cells and modules and LEDs declined by around 25 percent to just over US$50 billion a year.
Across sectors, the emergence of global value chains has led to greater specialisation in specific activities and segments of value chains, rather than in entire industries. More than 70 percent of global trade is in intermediate goods and services and in capital goods. Domestic solar PV and wind power generation also on an increasing share of imported intermediate inputs.
Eying the potential of clean energy to support domestic growth and employment, especially during the difficult years following the 2008 financial crisis, governments started implementing green industrial policies aimed at protecting domestic solar PV and wind turbine manufacturers. LCRs became particularly prevalent. These typically require solar or wind developers to source a specific share of jobs, components, or costs locally to be eligible for policy support or public tenders. Such requirements have been designed or implemented for solar and wind energy in at least 21 nations, including 16 OECD countries and emerging economies, mostly since 2009. Governments have also pursued green growth and employment objectives through granting preferential access to financing; improving export performance of solar PV and wind turbines through targeted measures; and setting technical barriers such as national standards that differ from international practices.
In contrast, regulatory restrictions on FDI, such as limits on foreign ownership, remain relatively low in solar PV and wind energy. Applied most favoured nation (MFN) import tariffs on solar PV cells and modules are zero nowadays in most high income countries and are less than five percent in the rest of the world. Applied MFN tariffs on complete wind powered generating sets are on average slightly higher. However, bound MFN tariffs – the maximum tariffs that WTO members could apply if they so choose – remain very high for wind powered generating sets, even in high income economies. These are around 17.5 percent on average and exceed 30 percent on an ad valorem basis in the rest of the world. The gaps between the applied and the bound tariff create uncertainty for investors and potential exporters since there is always the risk that countries with high bound tariffs.
Local content requirements off track
Results from a new OECD econometric analysis of the impact of local content requirements on international investment flows in solar PV and wind powered generating sets indicate that while FiT policies play an important role in attracting international investment, local content requirements have a detrimental effect on global international investment flows in these sectors, and hamper the effectiveness of FiT policies to which they are attached. This effect is measured based on total international investment flows in solar PV and wind-power generation between 2000 and 2011. The estimated detrimental effect of LCRs is slightly stronger when both domestic and international investments are considered and is not compensated by any positive impacts on domestic investment. In addition, according to results from a new 2014 OECD Investor Survey, LCRs stood out as the main policy impediment.
Several recent country experiences with LCRs in solar and wind energy show that local content requirements can raise the costs of downstream activities in the value chain, such as renewable energy based electricity generation, because they mandate the use of higher cost domestic inputs. Evidence suggests also that LCRs may not have been effective in several countries in generating domestic employment and added value across the solar and wind energy value chains and their removal helps support technology transfer and innovation. LCRs also reduced pressure to cut costs in domestic manufacturing activities, especially in countries without sufficient domestic market size, or local technical expertise. The use of LCRs has led to five disputes at the WTO since 2010. In addition, other policy-related distortions have given rise to a proliferation in trade disputes and retaliatory trade remedies around clean energy, which will further discourage firms from investing in the industry. Trade remedies include anti-dumping duties (AD) and countervailing duties (CVD) authorised under WTO rules to defend domestic producers against the alleged use of unfair dumping or actionable subsidies. Over the last five years, countries have imposed nine anti-dumping and seven countervailing duties on products associated with solar PV or wind energy, as well as launched more than two dozen WTO AD and CVD investigations on these. [Ref 6]
In a context of global value chains, policy restrictions affecting trade in intermediate goods can hinder the profitability of downstream power producers by raising the cost of inputs, or reducing overall demand as costs are passed through to consumers. A value chain approach also highlights the relative importance of downstream activities in terms of value added, local jobs, and investment. In the solar PV sector in particular, manufacturing activities represent only 18-24 percent of total jobs, according to recent estimates in the US and worldwide. [Ref 7] At least 50 percent of solar PV jobs and value added are located in downstream activities. This means that the impact of LCRs on local job creation and value added in midstream industries may thus be undermined by indirect negative effects on employment and value addition in downstream segments of the value chains. In addition, investment in downstream activities and infrastructure assets represents the bulk of total clean energy investment. Globally, manufacturing equipment represented only six percent of new investment in renewable energy in 2013.
An important implication of the rise of global value chains in the solar PV and wind energy sectors is that policy distortions in parts of the chain that might seem relatively unimportant when viewed in isolation can have important downstream effects. Sections of value chains that account for a small share of value added tend to be concentrated in a smaller number of countries. National policies that restrict trade and investment in these segments can have disproportionately large cross-border effects.
Getting back on track
Early government support for investment in clean energy was a great success story, not least because it adhered to the principle of non-discrimination. Evidence suggests, however, that the more recent use of policies that are unfair and distortionary has been detrimental to the solar and wind energy sectors. The time is right for governments to address policy misalignments across the clean energy value chains, while also ensuring that climate change, energy, trade and investment policies are consistent and coherent, in order to support the cost effective transition to a low carbon economy. Governments should consider alternatives to local content requirements to support their domestic solar PV and wind power industries. Policy options that would not restrict international trade and investment include targeted support to research, development, and innovation in renewable energy technologies; training programmes and promotion measures to build technological skills and local capability; well designed and predictable incentive measures such as FiTs with no local content requirements attached to them; and more effective carbon pricing instruments.
Creating a stable and predictable policy environment for both domestic and international investment in clean-energy based electricity generation is critical, as emphasised by the OECD’s latest Policy Guidance for Investment in Clean Energy Infrastructure. Supporting open, competitive, and demand-driven solar PV and wind energy sectors would help sustain the trend towards cost reductions and make renewable energy more economical relative to fossil fuel energy. This, in turn, would reduce the cost of policy support to clean energy. Evidence based analysis is needed to improve the coherence of clean energy support policies and reduce their cost. International cooperation is also needed to further align trade and investment policy in clean energy.
For more information about the new OECD report, Overcoming Barriers to International Investment in Clean Energy, please visit our website. The views expressed in this article are those of the authors, and do not necessarily reflect those of the OECD, nor of its member countries.
Geraldine Ang, Policy Analyst, Green Investment, Organisation for Economic Co-operation and Development (OECD)
Ronald Steenblik, Senior Trade Policy Analyst, OECD. Steenblik is a member of the E15Initiative Expert Group on Rethinking International Subsidies Disciplines.
[Ref 1] Bahar, Heymi, Jagoda Egeland, and Ronald Steenblik. "Domestic incentive measures for renewable energy with possible trade implications." OECD Trade and Environment Working Papers, 2013.
[Ref 2] Some US$285 billion in 2030 under current policies and Intended Nationally Determined Contributions (INDCs) submitted by countries in advance of the 21st session of the Conference of the Parties (COP 21) to the United Nations Framework Convention on Climate Change (UNFCCC) in December 2015 (“INDC Scenario”); World Energy Outlook Special Report: Energy and Climate Change. OECD/OEA, 2015.
[Ref 3] According to the IEA, feed-in tariffs and premiums (or bonuses) are price-driven incentives for the production of electricity from particular types of power sources, most often ones using renewable energy, and are typically differentiated by technology type and size of the installation. Feed-in tariffs grant a fixed and guaranteed price per megawatt hour (MWh) or kilowatt hour (KWh) to operators for the grid-connected electricity, typically over a 15- or 20-year period. In addition, FiT programmes can offer above-market price premiums on top of the feed-in tariff (regulated or market-driven).
[Ref 4] Renewable portfolio standards and renewables obligations require that a specified share of electricity supplied in a particular area be generated from renewable energy. Usually the requirements are fulfilled through tradable certificates, often called green or renewable energy certificates (RECs), thus allowing a separation of the financial obligation from the physical generation of electricity.
[Ref 5] Gambhir, Ajay, Rob Gross, and Richard Green. The impact of policy on technology innovation and cost reduction: a case study on crystalline silicon solar PV modules. Imperial College Working Paper, 2014.
[Ref 6] Excluding trade disputes linked to upstream production of raw materials; updated as of August 2014.
[Ref 7] CEEW, NRDC. "Laying the foundations for a bright future: assessing progress under Phase 1 of India's National Solar Mission. Interim Report, Delhi, Council on Energy, Environment and Water." Natural Resources Defense Council, 2012; The Solar Foundation, National Solar Jobs Census 2013: The Annual Review of the U.S. Solar Workforce, The Solar Foundation, Washington, DC., 2014; Rutovitz, J. and A. Atherton, “Energy sector jobs to 2030: a global analysis,” prepared for Greenpeace International by the Institute for Sustainable Futures, University of Technology, Sydney, 2009; EPIA and Greenpeace, Solar Generation 6: Solar Photovoltaic Electricity Empowering the World, European Photovoltaic Industry Association/Greenpeace International, 2011.