Authors: Georgios Evangelidis, Konstantinos Konstantakis, Panayotis Michaelides

Title: Renewable Energy Installations and Policy Assessment: Evidence from a Panel VAR analysis in Europe

Abstract

The ongoing energy crisis in Europe has deteriorated due to the war in Ukraine that led most European governments to stop their natural gas supply from Russia, as a protest against the war. In this context, the dire need for energy substitutes throughout the EU economies is on the agenda of most policy makers. The installation and growth of Clean and Renewable Energy remains until today a strong substitute against the dependence of fossil fuels. Nonetheless, due to the fact that the vast majority of renewable energy investments depend critically on private funds, the assessment of policies that could help in increasing these investments is of outmost importance.

There is a vast literature on the connection between energy consumption and economic growth. However, most of the studies can be classified based on their primary hypothesis tested, under four main categories. This, is possible, due to the fact that, based on the relevant literature, the energy consumption and economic growth relation can be analyzed under four hypotheses. Analytically, the hypotheses are the following:

1.     The growth hypothesis assumes energy as a major source of input into the growth process, and unidirectional causality exists from energy consumption to economic growth. In this scenario, energy conservation policies will have a negative impact on economic growth.

2.     The conservation hypothesis implies that economic growth causes consumption of energy. Under this situation, conservation policy will not affect eco-nomic growth.

3.     The feedback hypothesis implies a bi-directional relationship between energy consumption and economic growth. This hypothesis suggests any change in energy consumption will affect economic growth with a reverse effect.

4.     The neutrality hypothesis indicates that energy consumption and economic growth are independent and do not affect each other.

In this context, observing the causal relationship between electricity consumption and economic growth provides a basis for understanding the level of maturity of countries and provides insights and direction for the design and implementation of environmental and energy policies. It is not surprising that the empirical results are mixed in terms of the four hypotheses (growth, conservation, neutrality, and feedback) related to the causal relationship between electricity consumption and economic growth.

Of course, a wealth of econometric techniques has been applied throughout the years in order to test one or more of the aforementioned hypotheses, like Fully modified OLS (FMOLS), Dynamic Panel Analysis, Panel Vector Auto-regression (PVAR) equations for homogeneous panels, Generalized Method of Moments (GMM) panel estimator, Autoregressive-Distributed Lags Models (ARDL), Autoregressive Vector Error Cointegration (VEC), Granger non-causality, Toda-Yamamoto non-causality etc. The choice of each method depended on the both the sample, e.g. Time Series Panel Data sample; and the hypotheses that needed to be tested.

There are numerus studies that focus on individual countries all over the world, and also many other studies that investigate groups of countries in panel approaches, e.g. for the G7, G20 and EU countries. The last few years the analyses focus on CO2 emissions and Renewable Production.

In this study, besides the usual indicators, we introduce a new approach for the investigation of the connection of Economic Growth and New Renewable Installations in European countries with recorded rentable installations. New Renewable Installations is an urgent need for Energy adequacy in Europe and the way to promote them is a quest for clean energy. The current analysis casts light to the ways we have to increase new installations of Renewables.

Using data for the European countries that span the period 1995 - 2020, we assess the impact of renewable energy production on the growth of the European economies, evaluating at the same time the policies implemented. To do so, we make use of a panel-VAR setting which incorporates the key macroeconomic indicators like GDP and of course, energy dependent variables like Renewable Energy Production, Renewable Energy Capacity and Gross Fixed Capital Formation.

Based on our analysis, mixed results are observed. We focus on policies that tend to incentivize new renewable installations that should continue to be implemented focusing on carefully selected macroeconomic variables.