The Effect of Regulatory Uncertainty on Investment: Evidence from Renewable Energy Generation

How are firms' investment decisions influenced by potential instability in the regulatory environment? Firms that anticipate regulatory change may alter their responses to current policies, potentially rendering those policies less effective. This article explores the pattern of investments in renewable generation assets in the US electricity industry following the implementation of Renewable Portfolio Standard (RPS) policies. Viewing these investments through the lens of transaction cost economics, the article investigates whether the likelihood of future regulatory change in a state dampened (or spurred) firm responses to RPS policies in that state. I find that firms invested less in new assets in states that had previously passed and repealed legislation to restructure the electricity industry, indicating that perceived regulatory instability reduces new investment and undermines policy goals.