Local Content Requirements and the Renewable Energy Industry - A Good Match?

44 Pages Posted: 13 Dec 2012

Date Written: September 12, 2012

Abstract

This paper offers an initial assessment of the use of local content requirements (LCR) in renewable energy policy. It observes that in spite of free trade concerns, many countries with different levels of economic development attach LCR to their support schemes and procurement tenders. The legality and potential effectiveness of LCR are a pressing issue. Because of the financial crisis, public financing for low carbon policies and investments is more limited, especially in austerity-driven jurisdictions. At the same time, such policies and investments are needed to limit and counter climate change. The importance of analyzing opportunity costs, performing rigourous scientific research and discussing the use of LCR is thus self-evident.

This paper finds that local content requirements for renewable energy are used frequently, either as a precondition to the receipt of financial support or as part of eligibility requirements in public tenders. They are often attached to mostly expensive public financial support programs to gain some local benefits from increased renewable energy deployment. Most countries using them base their policy choices on political motivations, rather than on economic and empirical analyses, which remain largely absent in the case of LCR. However, it is found that under certain conditions content requirements may be able to facilitate the development of a global innovator that is able to compete on the international market and push down technology costs. These conditions are many, country- and technology-specific and complex. While it is found that LCR will cause short-term costs to the industry and will likely inflate retail power prices alike, a medium-term benefit of increasing competition and innovation on the international market may offset those costs. It is of great importance to note that this is a theoretical possibility. To date, these potential positive spill-over effects have not been demonstrated.

On the legal side, it is concluded that LCR for renewable energy are generally prohibited under WTO law. While financial support schemes with LCR attached will likely be ruled illegal, public procurement tenders are hardly disciplined by WTO law and may be permissible. From the scarse empirical literature on local content requirements, it is found that there are a number of initial basic conditions that determine the feasibility of creating domestic industries and, perhaps, subsequently innovators. In addition to a stable and sizeable market, the financial support (to which LCR are often linked) for the renewable energy sector needs to be sufficiently large not to scare off potential investors. The local content rate can also not be too restrictive, and needs to be coupled to learning benefits. Certain knowledge of the current technology increases effectiveness. Finally, when technologies are still in their infancy, the potential of LCR to create global competitors that reduce costs by learning-by-doing is higher. Many countries using LCR, however, do not explicitly target the creation of global innovators. The given basic conditions are broad and necessary, though not necessarily sufficient in the creation of innovative capacity.

This paper analyzes the wind LCR in China, and gives descriptive analyses for LCR in Ontario, Qu├ębec, Spain, Italy, France, Greece, Croatia, the US, India, Brazil, South Africa and Turkey.

Keywords: Local Content Requirements, Renewable Energy, Renewable Energy components, Solar Energy, Wind Energy, WTO Law, GATT, SCM Agreement, TRIMs Agreement, Infant Industry, Climate Change, China, Ontario, Job Creation, Domestic Industry

Suggested Citation

Kuntze, Jan-Christoph and Moerenhout, Tom, Local Content Requirements and the Renewable Energy Industry - A Good Match? (September 12, 2012). Available at SSRN: https://ssrn.com/abstract=2188607 or http://dx.doi.org/10.2139/ssrn.2188607

Tom Moerenhout

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

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