The Impact of Financial Incentives on Technology Adoption: Evidence from Random Allocation of Solar PV Subsidies

Abstract

To stimulate the adoption of renewable power generation, policymakers often resort to subsidies. However, the efficacy of such subsidies remains an important topic of debate. This paper exploits a natural experimental setting in which a solar PV subsidy is randomly assigned to applying households. By combining data collected from aerial images with detailed household-level information, we estimate the effect of subsidy provision on the adoption of solar PV, on installed capacity, timing of installation and ultimately, on electricity consumption. The results indicate that within the group of households that applied for the subsidy, the provision of subsidy led to a 25.2 percentage point increase in solar PV adoption. We also find that the subsidy has had a significant effect on the installed capacity and expedited solar installation by about a year. However, the subsequent electricity consumption of households accepted into the subsidy program decreased by just 7.1 percent, compared to the rejected applicant group, implying a cost of carbon of €1,036 per ton of CO2. Our findings suggest that more specific targeting of solar subsidies could lead to a 65% increase in subsidy efficiency.

Keywords: solar PV, subsidy programs, natural experiment, residential sector, carbon emissions

JEL Classification: Q28, Q42, Q48