Investments in Solar Power: a Practical Approach to Transaction Cost Theory: case study of Italy and Germany

It has become conventional wisdom under many scientists, official organisations and politicians that the diffusion of solar (and wind) power is becoming an essential and integral part in the mitigation of climate change and the resolution to the extremely elevated levels of GHG-emissions. As with any (relatively) new technology, the penetration of solar power heavily depends on the level of new investments in solar capacity and storage. This paper considers four main factors of influence on the level of investment in solar power in a specific country: technology and innovation, country-specific characteristics, economic developments and political (and cultural) institutions. This research paper focusses on the manner in which political institutions affect the level of investment in the deployment and infrastructure of solar power. The transaction cost approach on the study of potential investments analyses the possible costs involved in the transaction or investment. Two elements...Show moreIt has become conventional wisdom under many scientists, official organisations and politicians that the diffusion of solar (and wind) power is becoming an essential and integral part in the mitigation of climate change and the resolution to the extremely elevated levels of GHG-emissions. As with any (relatively) new technology, the penetration of solar power heavily depends on the level of new investments in solar capacity and storage. This paper considers four main factors of influence on the level of investment in solar power in a specific country: technology and innovation, country-specific characteristics, economic developments and political (and cultural) institutions. This research paper focusses on the manner in which political institutions affect the level of investment in the deployment and infrastructure of solar power. The transaction cost approach on the study of potential investments analyses the possible costs involved in the transaction or investment. Two elements have been demonstrated to increase the costs that incur when engaging in a certain transaction: uncertainty and opportunistic behaviour, either from one of the contracting parties or from a third party, whose interests oppose that of the transaction. Institutions, particularly political and cultural institutions, have a significant effect on the success of a certain transaction. This effect is magnified when it concerns highly specific assets and when the products that result from the transaction (investment) are consumed widely. Investments in solar power are prone to both types of transaction costs. Stable regulatory frameworks, regulatory contracting, relational contracting and a moderate degree of political fragmentation and third-party influence increase the feasibility and credibility of policy regimes. In the early stage of solar power deployment a number of countries, including Italy and Germany, the protagonists of this research paper, have successfully introduced feed-in-tariff support schemes to ease uncertainty for investors and stimulate further investments in solar technology and capacity. However, unilateral opportunistic behaviour from the Italian government that introduced retrospective changes to existing regulation and contracts has demonstrated to significantly damage investors’ trust and the dynamics of solar power investments. In addition, entrenched practices of clientelism and corruption in Italy considerably abate the possibility of foreign investments, necessary to increase the penetration of solar power in Italy. The ‘Italian style’ of relational contracting between private investors and the public agent, appears to be a functional solution in avoiding transaction costs for tenders, concession contracts or public private partnerships. Illustrative for the German market, in order to mitigate the hazard of third-party opportunism, characteristic to parliamentary democracy (with elevated levels of scrutiny and room for opposition), a rapprochement to market mechanism appears to be a suitable option. In addition, enhanced transparency and a penetrative governmental communication strategy could provide for broader public support and incentivise future investments in solar power.Show less

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Investments in Solar Power: a Practical Approach to Transaction Cost Theory: case study of Italy and Germany