Reducing Rents from Energy Technology Adoption Programs by Exploiting Observable Information

Abstract

In this paper, we study how regulators may improve upon the efficiency of their energy technology adoption programs by exploiting readily observable information to limit rent extraction by firms. Using panel data on 862 investment decisions in the Netherlands, we find that rent extraction is closely linked not only to technology characteristics, but also to the firm's capital budgetting technique. In particular, we find that firms are more likely to extract rent when either the technology's pay-back period or its required investment is lower, but less likely if they do not use a formal capital budgeting technique. Standard firm characteristics, such as size and sector, correlate with firms' use of capital budgeting techniques, thereby partly resolving the regulator's asymmetric information problem.

Technology adoption subsidies: An experiment with managers

“…Each game consisted of a 7 An example of such a program is the Energy Investment Credit (EIA) program in the Netherlands, which only subsidizes energy-saving technologies that appear on the so-called Energy List. See Aalbers et al (2007) for details. 8 The subsidy should induce exclusive search for non-subsidized technologies.…”

Lessons from 15 Years of Experience with the Dutch Tax Allowance for Energy Investments for Firms

“…Using results from a survey among a sample of EIA applicants between , De Beer et al (2000 asked respondents whether or not they would have made the same investment if the EIA had not been available; 52% of them answered affirmative and, therefore, could be considered 'free riders'. This percentage, however, varied strongly between subsidised technologies (see also Aalbers et al, 2011). The study also showed that considerable overlap existed between different subsidy schemes, as a particular investment could be eligible to enter into different subsidy programmes at the same time.…”

“…The cost-recovery period for some technologies already would be very short because of their market-based energy-saving performance, and relative to the critical payback period used in the particular sector. Additional financial support was likely to increase the overall number of 'free-riders' (see Aalbers et al, 2011). 14 The regulating agency's response to the outcome of this evaluation was to update the Energy List and apply maximum saving standards per euro 13.Normal m 3 gas equivalents; 1 Nm 3 gas eq = 31.65 MJ.…”

“…According to Aalbers et al (2011), half of the firms applying for subsidies do not even use traditional finance evaluation schemes, such as those involving critical payback periods.…”

“…These measures all have been introduced by the regulating agency to improve the incentive compatibility of the subsidy scheme and, therefore, its overall effectiveness and efficiency (Arguedas and Van Soest, 2009;Aalbers et al, 2011). Several indicators suggest that the performance of the allowance scheme indeed strongly improved after these measures became effective (since 2002).…”