Electricity prices and renewable energy development – evidence from 18 European countries
This study analyses the relationship between electricity prices and combined wind and solar installed capacity in 18 European countries. Considering the empirical cross-section dependence in the data series that could be due to close geographic proximity, similar consumption culture, and comparable economic and policy structures, this study utilizes panel econometric techniques that correct for biases introduced by cross-section dependence. Moreover, we control for the impact of natural gas price and per capita GDP on electricity price and renewable energy capacity in the regression analysis. We find evidence of bi-directional long-run relationships between electricity price and renewable energy capacity. In particular, a rise in electricity price will promote the development of renewable energy capacity while a rise in renewable energy capacity empirically reduces electricity price. The results provide support to the cannibalization effects of renewable energy, in which a rise in renewable capacity reduces electricity prices and hence the monetary returns and incentives to invest in renewable resources. Per capita GDP is found to exert a very strong positive influence on renewable capacity. Further, a rise in natural gas price or per capita GDP is estimated to increase electricity price.
Raymond Li is Associate Professor of Economics at the University of Canberra. Prior to this appointment, Ray held a faculty position at the Hong Kong Polytechnic University and taught Economics at Macquarie University. Ray’s research interests include applied econometrics and energy economics. He is particularly interested in energy demand, energy pricing and market integration studies. His research outputs appear in a range of high impact factor international journals like the Energy Journal, Energy Economics, Energy Policy, Energy and Applied Energy, among many others. Ray is an editorial board member of three international academic journals and he has reviewed numerous research articles for academic journals.
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