Delivering the Clean Energy Economy: Why Policy Matters

The global renewable energy industry has experienced dramatic growth in recent years. Renewable energy capacity (excluding hydropower) has more than doubled since 2005. In 2011, new clean energy investments reached a record $257 billion (a six-fold increase from 2004), and approximately half of the world’s new electric capacity came from renewable sources. These gains came despite the tumultuous backdrop of a global financial crisis and a rapidly changing clean energy technology industry - one that’s experiencing increased global competition, rapidly falling industry prices, and oversupply in the solar photovoltaic (PV) and wind sectors.

However, the benefits of the clean energy industry have not been shared evenly around the world. WRI’s new working paper, Delivering on the Clean Energy Economy, shows that countries have varied widely in their success of growing renewable energy industries that achieve both global competitiveness and domestic benefits. The main reason for this variation lies in the types of national policies the countries have in place.

According to our new research, countries who have been successful with their clean energy development have:

• Taken a Comprehensive Approach: Policies are integrated at the national level

• Sustained Policy in a Predictable Manner: Policies have an established lifetime of at least three-to-four years to enhance industry certainty

• Implemented Targeted Policies: Policies address the needs of different technologies and target the needs of the entire value chain

Delivering on the Clean Energy Economy

WRI developed its new working paper under the Open Climate Network, in partnership with Renmin University, Oko Institute, The Energy and Resources Institute, and the Institute for Global Environmental Strategies. The paper examines the development of the solar PV and wind industries across China, Germany, India, Japan, and the United States from 2001–2011. It takes a comparative approach to track the policy and incentive measures that countries took, documents the state-of-play in each market, and determines what strategies seem to have been most successful to date. In short, we found that policy is critical in developing successful renewable energy industries.

3 Policy Conditions that Drive Clean Energy Growth and Competitiveness

Key insights revealed through our research include:

1) Countries with comprehensive, predictable, and targeted policies have seen the biggest scale-up of domestic installations and manufacturing capacity.

This trend is evidenced in both Germany and China, where supportive policy frameworks are integrated into national economic and energy plans that have at least a five-year lifespan. These policies target cost reductions along the entire value chain—from manufacturing to installation— rather than simply subsidizing clean technology costs. In the solar PV sector, for example, both countries have created a positive feedback loop where relatively low and declining solar system prices are fueling annual installation rates that are three-to-seven times higher than in Japan or the United States. In turn, this situation is helping their domestic solar industries continue to reduce costs. It also keeps their impact on energy costs down.

2) Differences between solar PV and on-shore wind highlight the limitations of one-size-fits-all clean energy policy approaches.

Both the solar PV and on-shore wind industry value chains can be divided into “upstream” activities (related to research and development and manufacturing) and “downstream” activities (related to installation and electricity generation).

For the solar PV industry: Due to the international tradability of most solar PV components, building a domestic manufacturing sector appears to be only loosely related to domestic installation support policies. Therefore, it’s important for policies to explicitly target both portions of the value chain. Our analysis reveals that stable, well-designed national installation support policies that drive down average system prices are crucial to driving the highest annual installation rates (seen in both Germany and China). Successfully scaling-up domestic manufacturing capacity, on the other hand, seems to require building a competitive advantage either based on price or on high-quality, high-performance products.

For example, Japan, with the highest average solar module prices, has managed to maintain annual module manufacturing production comparable with Germany and double that of the United States by building on its quality advantage. While its competitors have taken more deliberate and active policy approaches, the United States has had a largely passive approach to manufacturing, with short bursts of national investment and policy support. This approach seems to have been less effective in the context of global competition, delivering the smallest national manufacturing capacity of the study countries.

For the on-shore wind industry: Our analysis reveals that policies which support domestic installation are fundamental for building both upstream and downstream domestic industries, largely due to the high costs associated with trading wind turbine components. Further, policy stability seems critical for driving growth in domestic wind manufacturing industries.

For example, significant additions of domestic manufacturing capacity in India, China, and the United States all followed the introduction of support policies that had at least a three-year time horizon. Short-term installation support policies delivered installations, but manufacturing capacity was slow to develop in all three countries until long-term policy was established. In the United States, the advantages of spending more on wind R&D than any of the other countries analyzed also seems to have been undercut by unpredictable market support policies, and it’s the only study country that remains a net importer of wind equipment.

3) Considering solar and wind’s entire value chain—both upstream and downstream activities—is important, as economic benefit opportunities extend beyond the manufacturing sector.

In designing support policies for clean energy industries, considering the entire value chain is critical, as significant economic opportunities lie beyond the manufacturing sector. Although limited comparable data on job estimates was available across all five countries, the evidence suggests that 50 to 60 percent of jobs for both technologies lie outside manufacturing.

A Clean Energy Guide for Policymakers

The story is still unfolding in the dynamic solar and wind industries. Looking at historical evidence to see who has been the most successful to date and being the next country to do it are two different tasks. However, the paper’s findings provide a useful guide for policymakers: By understanding enabling conditions that support clean energy growth and industry competitiveness, policymakers can continue to pursue renewables and the economic development opportunities they offer.

• Check out our new chart, a "Five Country Comparison of Renewable Energy Policies and Progress."