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Government Regulations Impacting Solar Energy

Case Aims: To illustrate how technological innovation can be influenced by governments rather than by market opportunity

Growing concerns about global warming and the adverse environmental impact of burning dirty fuels such as coal have influenced developed-nation governments to focus upon the replacement of hydro-carbon energy with renewable resources such as wind and solar power. The drawback with renewables is that the cost of generating energy is usually much greater than from traditional fuels. For example, even with technological advances, solar power remains a very expensive power source, over 500 % more expensive than coal.

Investment in solar power innovation has consequently made no practical sense to firms seeking to generate a profit from involvement in this sector of industry. Nevertheless solar power generation has enjoyed rapid expansion in recent years. However a key reason for this outcome is that government regulations mandating an increased use of renewables in energy generation, accompanied by public-sector funding, has prompted entrepreneurial activity to progress the development of new products within the sector. Incentives offered by governments include production subsidies, technology transfer, publicly funded R&D, consumption subsidies, tax credits and concessionary financing (Haley and Schuler 2011).

Solar energy firms are faced with environmental uncertainty in relation to investing in technological innovation or scaling up their operations. One source of environmental uncertainty arises from firms' inability to accurately predict future government policies or the consequences of response to new legislation. This situation, known as 'regulatory uncertainty', can arise because regulators disagree on regulatory direction. Key interest groups may argue about targets for regulation, whether scientific evidence exists for regulation, how to achieve targets and how to apply non-market strategies to affect these policies. Disagreement and uncertainty may also arise from how to implement regulation. For example in Europe, having announced subsidies for solar energy generation, governments have determined these are too expensive and subsequently severely reduced them, causing financial problems for both producers and consumers. Another source of uncertainty stems from the interdependence of solar energy regulation and other energy regulation (Price 2008). A key factor in


regulatory uncertainty has been governments adjusting to economic constraints such as the 2009-2010 recession. As a consequence the industry has often miscalculated changes in policy.

In response to government policies on stimulating increased production, many solar energy firms have closed factories close to their R&D facilities to leverage this resource, minimising technology transfer or enabling ongoing work between researchers and manufacturing. Despite the regulatory uncertainty, active technology creation in the USA has been enabled by access to venture capital, highly active entrepreneurs, strong IP laws and government research grants to support R&D, although investment in factories and support for entrepreneurial manufacturing process activities have declined as percentages of total production. This trend reflects an inability to predict regulatory changes, as well as consumption policies. Firms have migrated to large markets with consistent government policies to develop and refine their products (Mandle 2008).

Mandle (2008) noted that Shell Oil's former President and CEO John Hofmeister suggested that in America 'energy is politicized'. In reality this statement can be extended to cover most other major nations (e.g. Russia's use of gas pricing to influence the loyalty of Eastern European nations, or America's only recently revoked policy of banning oil and gas exports). It may be very relevant in the field of renewable energy as governments have sought to ensure their domestic firms have obtained a share of this rapidly growing sector within the energy industry. This situation creates a major dilemma for firms committed to a technological entrepreneurship strategy, because their success is dependent upon responding to government regulations, which may create obstacles to investment in new technologies capable of achieving long-term market success.

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