Contrasting Effects of Electricity Prices on Retrofit and New-Build Installations of Solar PV: Fukushima as a Natural Experiment

This paper examines the effects of financial incentives, particularly electricity prices, on residential solar photovoltaic system installations. We shed light on the importance of a factor that has been largely overlooked in the literature on the adoption behavior of low-carbon building technologies: the distinction between retrofit and new-build installations. To tackle the endogeneity of electricity prices, we use the 2011 Fukushima nuclear accident and subsequent shutdown of nuclear power plants in Japan as a natural experiment that caused substantial, exogenous, and regionally varying hikes in electricity generation costs and prices. For 2009–2014, electricity prices exhibit a statistically significant, positive effect for existing homes (with the mean elasticity of 1.6), but only a statistically insignificant, much smaller effect for new-build homes. A policy implication of the contrasting responses is that financial incentive schemes for low-carbon building technologies can be made more cost-effective by targeting retrofits more. We also find a large downward bias (40%–60%) if electricity prices are not instrumented with exogenous cost-shifters.