Energy subsidies, structure of electricity prices and technological change of energy use

- We investigate the impact of the structure of energy prices on energy innovation.
- We match the interest in induced clean innovation with concern for subsidy reform.
- The analysis includes 20 OECD economies in the period 1990-2006.
- Reducing the energy subsidy to large users leads to more clean energy inventions.
- The effect is stronger for decentralized energy technologies such as solar power.

This paper addresses the impact of the structure of energy prices on technological change in renewable energy sources. It operates on two fields of research that are often not related to each other. Firstly, the increasing interest in environmental economics for the determinants of green technological change, and secondly the impact of government policies aimed at subsidizing energy prices. Recent research claims a positive relationship between energy prices and the number of patents in the fields of energy efficiency. This paper extends this research by investigating the impact of the price structure of electricity on patent counts in 1) renewable energy sources, 2) wind energy and 3) solar power. In nearly all OECD countries in the period 1990-2006 industrial energy users pay a lower price per energy unit than households due, among others, to government subsidy policies. The empirical results show that reducing government subsidies and hence increasing the electricity price of (large) industrial electricity users relative to the price paid by (small) residential users provides a clear incentive to increase inventions as measured by number of patents in the technical fields of solar and wind energy. These results are an important input in the debate on reducing government support to large energy users.