What motivates developing countries to diversify sources of renewable energy?

Abstract

This paper investigates the determinants of diversification of nonhydro renewable energy sources using a substantially larger data set covering 117 developing countries over the period 1980-2011. We use a novel variable capturing diversification of nonhydro renewable energy sources (geothermal, solar, wind, waste and biomass) and explore several estimation techniques such as two-part model, negative binomial and Poisson pseudo-maximum likelihood. Results show that higher per capita income, implementation of policies promoting renewable energy, advances in technological innovation and improvement in human capital promotes diversification. Although the results are consistent with the literature, this study differentiates itself by including the nonlinear effect of income. Results show that nonlinear effect of income is evident across specifications suggesting non-monotonic changes in diversification as developing countries get more affluent. In addition, concerns related to energy security such as high dependence on foreign sources of fuel and increasing world market price for crude oil will push developing countries to diversify sources of nonhydro renewable energy. In contrast, local abundance of hydropower and availability of natural resource like oil impede diversification. Finally, we find robust evidence that Kyoto Protocol positively influence diversification of nonhydro renewable energy sources in developing countries but no conclusive results can be claimed for financial sector development. This suggests that progressive integration of diversified renewables in developing countries' energy mix can be hastened given relevant policy mix and favorable economic conditions.