b i o m a s s a n d b i o e n e r g y 5 7 ( 2 0 1 3 ) 9 7 e1 0 5

Available online at www.sciencedirect.com

http://www.elsevier.com/locate/biombioe

The role of governments in renewable energy:

The importance of policy consistency

William White a,*, Anders Lunnan b,1, Erlend Nybakk c,2, Biljana Kulisic d,3
a
Natural Resources Canada, Canadian Forest Service, Northern Forestry Centre, 5320 122nd St. Edmonton, AB,
Canada T6H 3S5
b
UMB School of Economics and Business, 1432 Aas, Norway
c
The Norwegian Forest and Landscape Institute, Box 115, 1431 Aas, Norway
d
Energy Institute Hrvoje Pozar, Department for Renewable Energy Sources and Energy Efficiency, Savska 163,
HR-10000 Zagreb, Croatia

article info abstract

Article history: The renewable energy sector (RES) often receives financial, institutional or educational
Received 20 June 2012 support from the government. A significant challenge for the actors in the RES field is
Received in revised form policy consistency. When investments are carried out, a prognosis for future policies must
18 December 2012 be made. If the future is uncertain, larger risk margins should be included in the invest-
Accepted 22 December 2012 ment appraisals. Sudden, unexpected policy changes are one type of uncertainty that
Available online 12 January 2013 makes it more difficult to attract capital. In this article, we discuss the consequences of
discontinuities in policy support using a case study approach. In Ontario, feed-in tariffs
Keywords: were introduced in 2009 and resulted in a large uptake in the programme. In 2010, the
Bio-diesel subsidies were drastically cut, resulting in the RES community losing confidence that the
Wind sector government would offer consistent support to the sector. In Norway, a large new biodiesel
Solar PV sectors plant was opened by the Minister of the Environment only a few weeks before the gov-
Feed-in tariff ernment announced a major change in the bioenergy policy. As a result, the new plant was
Policy economics closed and restructured, and the investors lost nearly all of their investments. The gov-
Predictable policy measure ernment lost political credibility, making it difficult to raise private capital for new in-
vestments in this sector in Norway. We do not argue that policies should not be changed,
but the manner in which policies are changed plays an important role. Our study shows
that large, unexpected changes in policies increase uncertainty and may have a negative
impact on investments. This topic should be further researched.
Crown Copyright 2013 Published by Elsevier Ltd. All rights reserved.

1. Introduction support usually takes the form of financial, institutional, or

educational aid. Usually, governments provide financial sup-
Under the current energy market structure, renewable port by introducing subsidisation schemes, grants, and/or
energy systems often receive government support [1,2]. This feed-in tariffs/quota systems. These schemes are typically

* Corresponding author. Tel.: 1 780 435 7315; fax: 1 780 435 7359.
E-mail addresses: bwhite@nrcan.gc.ca, billwhite2334@gmail.com (W. White), anders.lunnan@umb.no (A. Lunnan), erlend.nybakk@
skogoglandskap.no (E. Nybakk).
1
Tel.: 47 64965686.
2
Tel.: 47 64949099.
3
Tel.: 385 1 6326 169.
0961-9534/$ e see front matter Crown Copyright 2013 Published by Elsevier Ltd. All rights reserved.
http://dx.doi.org/10.1016/j.biombioe.2012.12.035
98 b i o m a s s a n d b i o e n e r g y 5 7 ( 2 0 1 3 ) 9 7 e1 0 5
aimed at promoting positive externalities or assisting infant
industries in which the private sector is not likely to be
involved, such as landfills. These types of involvement share
the common thread of involving a transfer of government
resources to the market to alter the behaviour of the other
agents in the economy (firms and households).
There are numerous studies on how to achieve policy goals
for renewable energy (e.g., [3]). When formulating new and
long-term support policies for bioenergy, not only should
a clear target be set, but the target should also be accompanied
by a clear vision. An IEA report [3] highlights the following
points as important in developing bioenergy policy: to reach
long-term policy targets, concrete financial support types
must be developed; unsustainable production and the use of
biomass and bioenergy carriers should be prevented; care
should be taken to avoid (policy-induced) competition for
biomass feedstock; the long-term continuity of policy support
appears to be the single most important factor; and finally,
bioenergy support policies are a precondition, but not a guar-
antee, for the successful development of bioenergy. Addi-
tional factors include the legal, administrative, technological,
and cognitive frameworks, among others.
Despite the fact that the IEA [3] identify the long-term
continuity of policy support as the most important factor in
achieving policy goals on renewable energy, scholars have
failed to address this important issue in the bioenergy liter-
ature. However, there has been interest in this topic among
experts in the rational expectations theory, and a key paper
was produced by Kydland and Prescott [4]). They argue that
desired policy outcomes can best be obtained through con-
sistent policy rules rather than through discretionary policies.
Other important papers were written by Calvo [5] and Barro
and Gordon [6]. All of these papers focus on macroeconomic
policy in general, with a particular focus on monetary policy.
Other authors have investigated the role of policy consistency
in pollution regulations [7,8] and environmental policies [9].
With respect to environmental policy, arguments are made for
policy consistency, but it is important to recognise that there
are times when governments must react to abruptly changing
external conditions.
To fill this gap, we will discuss the consequences of dis-
continuities in policy support using a case study approach.
The aim of this study is to emphasise the impact of policy
inconsistencies on new investments and to address topics of
further research. We achieve this by conducting two case
studies in which the effects of unexpected policy changes on
the agents in the renewable energy sector (RES) are examined.
The case studies are obtained from disparate geographies
(Ontario, Canada and Norway) and various renewable prod-
ucts (wind and solar in one case and biofuel in the other) to
demonstrate that the issue is not restricted to a specific time,
place or product. This paper will explore the importance of
providing consistent policy signals to firms and consumers if
the government desires for these agents to behave in a man-
ner that produces the intended policy outcomes.
The next section briefly compares the externalities asso-
ciated with RESs (as opposed to their primary role as
a renewable energy source) with the governmental role in
improving social welfare by preventing market failures. The
following section discusses the importance of policy
consistency in general terms, which is followed by a review of
two case studies. The first review describes the green energy
policy of the Canadian province of Ontario, and the second
review discusses a Norwegian biodiesel firm and the effects of
mid-stream changes in policy on the players involved. The
paper closes with several concluding remarks.
2. Literature review
2.1. The role of governments in renewable energy
systems
This section considers all levels of government from civic to
county, regional to state and provincial to national govern-
ments. Implementing a successful RES policy has proven to be
difficult for governments to achieve (see Mitchell and Connor
[10] and Wood and Dow [11] for discussions regarding the
challenges faced by the United Kingdom). While private firms
respond primarily to the drivers of profits, the actions taken by
governments should be driven by a desire to improve social
welfare regardless of the role they (the governments) play
in RESs. Potential energy-related drivers for a government
seeking to improve social welfare include energy security, en-
ergy supply, energy affordability, sustainability, and adapting
to and mitigating climate change. Creating job opportunities,
particularly in rural and remote regions, can also be an
important driver for government involvement in RESs. Corpo-
rate profitability, balanced with improvements in the overall
standard of living, will also be a component of social welfare.
The potential roles of the government in the bioenergy econ-
omy are described herein as the tools that governments have at
their disposal to improve social welfare through the bioenergy
economy. The diverse set of goals that governments may
pursue and the many drivers that are affected by the govern-
ments make it difficult for them to have clear and consistent
policies, a factor that can hamper their efforts to assist the RES
market [10]. Government policies must also be developed with
a consideration for public support. A policy implemented
without a reasonable level of public support will have difficult
time succeeding and the governments that implement them
may have trouble finding support from the public they need to
re-elect them.
The government may participate in the bioenergy econ-
omy as an owner of a production facility. This involvement
can range from a community-owned district heating plant to
bioenergy production as part of a provincially or state-owned
energy enterprise. Economic theory explains that government
intervention in the economy should occur in the case of
market failure and in cases where this intervention would
result in an improvement in social welfare. Thus, when
a government includes bioenergy as a part of the production
process, it should only do so because social welfare is
advanced by this action. The current profits should be a sec-
ondary consideration along with the government revenues
(i.e., taxes) that are required to operate the facility.
A more common role for governments in the bioenergy
economy is in the development of policies that affect the
behaviour of households and firms. Households maximise
utility, a portion of which includes financial well-being,
 b i o m a s s a n d b i o e n e r g y 5 7 ( 2 0 1 3 ) 9 7 e1 0 5
while firms respond to costs and profits, which are their
primary drivers. Through taxes, subsidies and regulations,
governments can have a direct impact on these factors. The
typical tools used to assist the start-up of RES firms involve
either influencing the price (i.e., feed-in tariffs) or the
quantity (i.e., quotas).
A comparison of the support schemes for the market-
based deployment of renewable energy in the UK and Ger-
many showed that the feed-in tariff (FIT) reduced the costs to
consumers and resulted in larger deployment mechanisms
than quota and auction mechanisms [12]. Other studies have
also shown that the German EEG (Erneuerbare-Energien-
Gesetz) has been more effective in increasing the share of
renewables than in generating policies in England and Wales
[13]. Even if the FIT in Germany is gradually reduced by 5%
annually, the production of renewable electricity will increase
annually [14]. While the FIT is changing, the consistent annual
reductions are an example of the policy consistency that has
characterized German policy.
Developing an optimal policy by aggregating individual
preferences either via indifference-curve mapping or through
utility functions is not as straightforward a solution as eco-
nomic theory would suggest. Policies cannot be directly
inferred from individual preferences [15] because they depend
on additional political and institutional factors. A government
must be aware of the existing drivers and weigh those pref-
erences to tailor their implementation plans for achieving
desirable strategic goals. For example, the government sub-
sidisation of district heating may help firms overcome barriers
to enter the market and may allow them to profitably sell
energy at lower prices than they otherwise could, which, in
turn, would increase the quantities demanded by households
and firms that choose to purchase bioenergy. These measures
could be aimed at discouraging the use of non-renewable
energy sources or promoting renewable substitutes.
A lack of complete and accurate information is an impedi-
ment to both firms and households in selecting optimal levels
of bioenergy and to governments in developing policies. Gov-
ernments can supply information in a cost-effective manner,
but they will only do so if they believe that the cost involved
will be justified by the resulting increase in social welfare.
Governments can accomplish this goal through demon-
stration projects, by funding and disseminating research re-
sults, and through various forms of media, pamphlets or
websites that inform potential customers about bioenergy and
other related topics.
Governments, at each level, assume the role of shaping the
economy according to their strategy for development. A chal-
lenge for governments is the existence of different goals for the
different levels of government. A local government interested
in the local control of the energy supply and in creating more
local jobs may opt for a bioenergy project. Hypothetically, this
situation could lead to workers migrating from another region
of the country where, for example, poverty is an extreme
problem, and these job losses will only exacerbate the prob-
lem. The national government, which is interested in social
welfare at the national level, views this action as one that
negatively impacts overall social welfare. Should the national
government intervene? A similar challenge faces national
governments that are negotiating in international agreements.
99
Could a national government attempting to contribute to
global welfare actually harm its own countrys welfare? This
occurrence is not outside the realm of possibilities. From
a theoretical perspective, we know from Tinbergen [16] that
different goals require different policy instruments. Generally,
there must be at least one more measurement than there are
goals. In theory, this model works well. In practice, however,
goals and instruments at different levels are not independent,
thus making it difficult to determine whether the Tinbergen
model is working efficiently.
The most important role of the government in the RES
market is to provide an environment through rules and reg-
ulations that will support free market forces, i.e., that will
provide a system for market development that will not require
government intervention to maximise social welfare. Clearly,
intervention remains an option for the government if market
failure persists. A set of rules should lead companies toward
achieving the governments aims for RESs, regardless of the
different aspects (energy, sustainability, climate change,
employment) of the RES projects that fall under the jurisdic-
tions of various governmental bodies. The governments set of
drivers should not confuse the company but instead direct the
company toward the governments goals. Lewis and Wiser [17]
present an additional benefit of the assistance of the govern-
ment in market development by stating that a strong local RES
industry can develop into a strong international company.
Numerous studies [1,18] suggest that bioenergy is the
renewable energy source that provides the most positive ex-
ternalities. Bioenergy is not without negative externalities as
much has been written in the press about the role of bioenergy
and biofuels in causing a rise in food costs. It has been
claimed, however, that renewable energy prices are not
competitive with fossil fuel prices because fossil fuel prices do
not offset the negative externalities associated with fossil
fuels. This phenomenon may explain the findings of Burer
[19], who found that the method preferred by businesses that
can be used to assist in making renewables competitive with
fossil fuels is the FIT. The logic appears to be that if the cost of
fossil fuels is artificially low because the externalities are not
internalised, then we should make the cost of renewables
artificially low by providing a FIT. Governments affect the
actions of individuals and firms through laws or taxes (known
as Pigovian taxes) which affect prices, and cause a redis-
tribution of income. The goal of these interventions is to
correct the negative externalities in the overall economy by
improving the social welfare function, thus collectively ben-
efitting the people even if it is at the expense (loss of utility or
profit) of some individual households or firms [20]. While the
efforts in and means for improving social welfare create
additional costs to society, the government can use bioenergy
as a tool with which to address other social issues, as well as
to improve its energy portfolio [21] by participating in the RES
market, thereby creating positive externalities for the overall
welfare of a society. Ideally, this situation would be achieved
through profitable ventures wherever possible to optimise the
use of tax revenues.
A governments task is complicated by the fact that they
cannot consider the bioenergy sector in isolation, but rather as
a part of a complex economy composed of households and
firms, each of which may be affected by policy changes. In this
100 b i o m a s s a n d b i o e n e r g y 5 7 ( 2 0 1 3 ) 9 7 e1 0 5
same light, governments cannot separate economic and social
policies; all of the actions that ultimately affect household or
firm behaviour fall, by definition, within the realm of eco-
nomics. Finally, a governments task is never complete. In
a world of constant change on the global to local scales, gov-
ernments must constantly be monitoring the current condi-
tions and values of their citizens to ensure that their polices
are augmenting social welfare. Globalisation is pressuring
governments to reduce the tax burdens on business activities.
Thus, governments should seek projects and solutions that
raise incomes and directly increase their revenue collections
from income and other taxes when they believe that the
increased expenditures will increase social welfare.
2.2. Policy consistency
To understand the importance of policy consistency, one
must first understand how firms and households make de-
cisions. People or households have preferences, or likes and
dislikes, and they are able to translate these likes and dislikes
into how much they value one good over another good. This
phenomenon is known as consumer sovereignty. People make
rational choices that are constrained by budgets, laws, social
norms, and other factors to make themselves as well off as
possible. A rational choice is defined as any choice that is
viewed as the best choice from the point of view of the person
making the decision. Choices are made based on the infor-
mation that is available at the time the decision is made.
When a household must consider a favourable governmental
policy when making a decision, the governments past per-
formance in maintaining their policies becomes an important
consideration.
Economic theory portrays firms as profit maximisers.
Therefore, firms choose optimal levels of capital, labour and
other inputs, as well as a production process, to meet this goal.
A firms choices are shaped, similar to individual choices, by
budgets, laws, and regulations. As with households, potential
changes in policy can be an important consideration in a de-
cision to make a particular investment. Nybakk et al. [22]
studied fourteen bioenergy companies across Europe and
found that policy and policy measures played an important
role in the innovations of the companies. Furthermore,
Nybakk [23] emphasised the importance of risk in the inno-
vation of SMEs.
The importance of policy consistency is noted by numer-
ous groups that have had an interest in promoting RESs.
Miranda [24] notes the importance of both clarity and con-
sistency in RES policies, noting that many projects will require
access to credit because they require large capital investments
in excess of what a household or firm may have available in
equity. If there is uncertainty that a government policy that is
necessary to make the project feasible will remain in place,
loans will be difficult (and costly) to obtain. Similarly, if a pol-
icy is unclear, it may be difficult to determine if government
funding can actually be obtained.
Mallon [25] argues that an unstable policy is worse than no
policy at all. The negative consequences of the collapse of a
project or projects may outweigh the positive effects that could
have resulted from projects that did not depend on govern-
ment incentives. The author cites Germany (see also [26]) as an
example of a country that has benefited from consistent pol-
icies in implementing RESs and the US as a country that has
suffered from inconsistent policies [27]. The 2009 amendments
of the FIT system in the Austrian O kostromgesetz (Eco-elec-
tricity Act) affected most of the investments in biogas plants
[28]. Similarly, Raven and Gregersen [29] cite changes in envi-
ronmental and energy policies as key factors in the setback of
biogas plants in Denmark.
Advocacy groups for renewable energy consistently note
the need for policy stability and consistency. Canadas Rural
Partnership [30] states the importance of .policy support
[being] consistent, long term, and predictable to avoid boom-
bust cycles. At the annual meeting of the American Council
on Renewable Energy, a long-term consistency in govern-
ment policy was requested [31], and the keynote speaker, US
Senator Lisa Murkowski, stated that, we need policies that
can endure both the passage of time and shifts in party lines,
and that will receive consistent funding for five years or ten
years or longer. In the United Kingdom, the Confederation of
British Industry and several key industry leaders called on the
United Kingdom government to end policy uncertainty in the
area of renewable energy [32]. This occurrence followed the
substantial decreases in the FIT for wind and solar shortly
after they were introduced.
The previous discussion is not meant to imply that policies
should not be changed. Policies must be flexible enough to
adapt to new technologies and changing markets, and they
must ensure that new ventures are economically feasible until
they can stand on their own. What must be avoided are the
frequent and unpredictable policy changes that disrupt mar-
kets and discourage investments [24].
3. Materials and methods
In this study, a descriptive perspective is used to exemplify the
effect of unexpected changes in the policies on renewable
energy firms and industries. Through case studies, we illus-
trate how policy changes have affected an industry and a -
liquid wood bioenergy firm (Norway), as well as a firm in
a broader suite of renewable energy firms (Ontario, Canada).
When the main question is how and the aim is to exemplify
rather than generalise, a qualitative case study approach is
recommended [33].
To identify two information-rich cases, we investigated
secondary information, including newspaper articles on the
chosen policy changes and reports and speeches from industry
conferences. The case study data were collected in 2010 and
2011 using secondary data and primary data from a phone
interview (see Table 1 for more information). Secondary data
were chosen because they were readily available at low cost and
provided easy access to a number of viewpoints. The potential
drawbacks of such data include the potential bias stemming
from the political views of a particular newspaper or the se-
lective reporting of the more sensational aspects of a story,
while neglecting key but mundane details. These challenges
were overcome by reading a number of accounts from different
sources and by verifying the consistency of the reports.
Analysing case study data is challenging due to the large
variability in the data [33]. In the Norwegian case, personal
 b i o m a s s a n d b i o e n e r g y 5 7 ( 2 0 1 3 ) 9 7 e1 0 5
Table 1 e Data collected from the two case studies.
Case study Case description
Canada Sudden changes to Ontarios Green Energy
Act affected investments already in place and
planned investments in wind and solar power.
This case study reviews the changes resulting
from these unexpected changes in policy.
Norway The Norwegian governments removal of tax
exemptions for biodiesel was unanticipated.
The case study reviews the impact on a new
company that invested in a large biodiesel plant.
interviews were conducted. Notes were taken during the
interview, and the full version of the case study was com-
pleted within 24 h after the interview [34].
4. Results from the case studies
4.1. The case of Ontario, Canada
By passing the Green Energy Act in 2009, Ontario became the
first province to introduce a FIT to encourage renewable en-
ergy, which made them a green energy leader in Canada. The
rates were considered generous when they were introduced
and included z.0063V per MWh (.0080 $ CDN converted
at .7878 18 Dec 2012) for solar PV, z.001 V per MWh (.00135
$CDN converted at 1 CAD .7878 V 18 Dec 2012) for
wind power, and a range of z.0008 to .0015 V per MWh
(.00105e.00195 $ CDN per MWh converted at 1 CAD .7878 V 18
Dec 2012 for bioenergy). Domestic content requirements were
expected to create 55,000 new jobs in Ontario primarily in
businesses that would build, install and operate RESs.
These rates were considered to be too generous by those
who believed it could only result in increased taxes and higher
tariffs for traditional energy sources. Adopters of new tech-
nology welcomed the rates and this resulted in a large uptake
of the programme. A total of 16,000 micro-FIT applications
were received, with 80% of the applications being for small
ground-mount solar systems. When the programme was
designed, the government was planning to provide a small FIT
for small ground systems but was convinced to treat ground-
mount and rooftop systems similarly, believing that there
would be a small number of ground-mount applications.
This belief was a serious misjudgement and resulted in the
planned reduction of the FIT for ground-mount systems
to z.0046Vper MWh (.00588 $CAD converted at CAD .7878 V
18 Dec 2012). A compromise of z.0051V per MWh (.00642
$CDN converted at CAD .7878 V 18 Dec 2012) was finally
implemented. The solar industry was unhappy with this de-
cision because many companies had already ordered in-
ventory and hired staff, for example, based on the expected
demand at the higher FIT. Farmers were the leaders in
101
Data collected
Sources of secondary data included a Google search and
a search of urban Ontario newspaper websites. The website
of the Ontario Power Generation corporation was used to
obtain feed-in rates and official announcements of
feed-in tariff changes. The important references used
include the Ontario Power Authority [35]; Hamilton
Star [36]; Globe & Mail [37]; Globe & Mail [38];
Globe & Mail [39]; and ClearSky Advisors [40].
Data were obtained from semi-structured phone
interviews with key people. The manager of a key
company was affected by the changes.
Sources of secondary data included a Google search
with relevant keywords, newspapers, research
reports, presentations given by CEOs and business
journal articles.
implementing solar projects and, along with the solar in-
dustry, were the players that were most affected. In fact,
20,000 farmers were awarded contracts and were affected by
the reduction in the FIT. Approximately 1,000 farmers were
told that the province did not have the transmission capacity
to move forward with their projects, many of whom had
already made investments to implement their projects.
In early 2012, uncertainty continued in the Ontario RES and
in the solar sector in particular. The Ontario government
reduced the number of proposals that would be eligible for the
20-year fixed FIT. The proposals submitted more than a year
previously were not eligible for the current FIT rates. The
revised prices mentioned earlier in this section are under re-
view by the Province and the Ontario Power Authority [35].
The industry is aware that new prices are being implemented
(which they did not know with the changes noted earlier), but
there is now uncertainty due to the lack of knowledge
regarding the yet to be announced rules and rates that will be
applied to most new contracts. The motivation for the review
was that the solar and other green power production costs
were expected to decrease, along with the governments
desire to pass on these savings to consumers rather than to
producers.
An example of how these recent changes can affect a pro-
ducer can be illustrated by the Region of Waterloo Ontario.
The region borrowed funds to install 25 rooftop solar-power
projects and had expected to recoup its investment and
make a profit based on the 20-year FIT rates under which they
applied for funding. However, seven of those proposals were
caught in the retroactive cap and will be subject to the new
lower pricing. As a result, the region may have to revisit their
plans.
The overall expected impact of the sudden changes that
occurred in 2010 and the proposed, but unknown, changes on
the horizon have varied. Several producers were hurt when
they planned investments under one policy but had to live
under another. Other producers were able to implement their
plans, but the policy did not account for the fact that the grid
capacity constraints imposed by the local distribution com-
panies would inhibit the sale of power to the grid. Despite this
circumstance, the Ontario PV market experienced significant
102 b i o m a s s a n d b i o e n e r g y 5 7 ( 2 0 1 3 ) 9 7 e1 0 5
growth in 2011, and significant growth is also expected in
2012, although this finding is dependent on the outcome of the
FIT review. One of the reasons for optimism is the expectation
that the FIT review will provide a system with greater cer-
tainty in terms of the application process, grid connections,
and prices. If the review process takes longer than expected,
an element of uncertainty will be added to the process and will
slow the impressive growth of the sector.
Ontarios wind power was also affected by a mid-stream
policy change. In February 2011, the province announced
that it would not allow any offshore wind power projects on
the Great Lakes until further environmental assessments
were conducted. Onshore wind power projects were not
affected by the policy change.
4.2. The Norwegian case study (removal of tax
exemptions for biodiesel)
From 1999 to 2010, there was a Norwegian car diesel tax
exemption on biodiesel, which affected vehicles such as
electrical cars and cars using biogas and natural gas. The tax
exemption was a generous indirect subsidy for biodiesel that
equalled approximately .45 V per litre. The main principle of
the Norwegian environmental policy is the polluter pay prin-
ciple. Because biodiesel cars also contribute to wear on the
roads, particulate emissions, queues and road accidents, the
drivers should pay for those costs, regardless of the type of
fuel that is used. If the government desires to reduce the use of
fossil fuels, according to economic theory, the best alternative
would be to impose a tax on fossil fuels. However, because an
increase in the tax on fossil fuels is politically controversial,
politicians prefer to subsidise alternative fuels.
Habiol, the first company to promote biodiesel in Norway,
was founded in 1994. In 2002, the company began planning
a large biodiesel plant (capacity of 100,000 tons) in southern
Norway. The investors of Habiol consisted of two venture
companies with 48% of the shares, 60 farmers, and several
minor investors. In 2006, the plans were completed, and a new
company, Uniol, was founded. The investors of Uniol included
Habiol (31%), a biorefinery company; Borregaard (16%), an
aquaculture company; Cermaq (40%), an agricultural cooper-
ative; stfoldkorn; and several other minor investors. In total,
the equity capital of Uniol was z27 M V (200 M NOK converted
at NOK .1351 V 18 Dec 2012). To build the factory in Fredrik-
stad, a loan of z20.3 M V (150 mill NOK converted at
NOK .1351 V 18 Dec 2012) was obtained from Raffeisenbank in
Vienna, Austria. Before beginning the construction of the plant,
the board of Uniol held a meeting with politicians in the Nor-
wegian Parliament, where they discussed the policy frame-
work for the plant. The vast majority in Parliament was highly
supportive of the plan as a climate measure and assured Uniol
that there would be no major policy changes in the coming
years, which was sufficient for the board to make a final in-
vestment decision. The plant was opened on June 6, 2009 by the
Minister of the Environment. The biodiesel plant in Fredrikstad
was, at that time, the most modern plant in Europe and was
designed to be able to use a wide variety of inputs.
At the same time that the plant was opened, the govern-
ment completed its budget proposal for 2010. In this budget,
the tax exemption for biodiesel was proposed to be removed.
The environmental NGOs opposed this proposal. There was
considerable opposition to the proposal within the govern-
ment, but the prime minister managed to convince the gov-
ernment to back the proposal. In the public debate, the
government was massively criticised, with only a few econo-
mists supporting the proposal. In November 2009, the tax
exemption for biodiesel was decided on by Parliament with
only a small change; namely, biodiesel would receive a 50%
tax exemption in 2010 and no tax exemption in 2011. The
situation for Uniol was critical because the company required
an additional 6.5 M V (50 M NOK converted at NOK .1351 V 18
Dec 2012 (from their investors to continue production. After
the major change in policy, the investors were not willing to
invest any more money in the company and controlled liqui-
dation was the only option. The investors lost most of their
money, the employees lost their jobs, and Raffeisenbank took
over the plant. Uniol was sold in 2011 to a Russian/Canadian
consortium and is now focussing on the production of bio-
diesel from animal fat. Habiol was sold to Scanbio in May 2010,
and the investors in Habiol accepted a loss of (z10 mill V)
(73 M NOK converted at NOK .1351 V 18 Dec 2012).
The main insights from this case are that annual budgets
with no long-term strategies introduce uncertainty in the
renewable energy industry and make it difficult to raise cap-
ital for investments. The industry is requesting predictable
policies and not necessarily subsidies. Without predictable
policies, long term-investments will not occur.
5. Discussion and implications
The main consequence of the major policy change in Norway
is that it is currently difficult to raise private capital for
renewable energy investments in Norway. To meet this
challenge, the government announced in 2011 that the recent
policy regime concerning biofuels will be maintained until
2015. In addition, the government postponed the 50% tax
exemption until 2015. If Uniol had been aware of this policy
when the controlled liquidation was performed, the company
may have been able to raise the required amount of capital.
Indirectly, the uncertainties with respect to future policies
have also played a major role in the abandonment of other
planned larger investments in new biodiesel plants in Nor-
way. At the same time that the change in the tax regime for
biodiesel was implemented in 2009, the government decided
that all of the diesel sold in Norway must contain 2.5% bio-
diesel. This decision may have been a good solution for Uniol,
but the blending of the fuel is controlled and implemented by
the oil companies, which is a market that has been considered
to be too uncertain. There was also considerable uncertainty
regarding the actual implementation of this regulation. A
main problem for the industry is that government budgets are
decided annually, and no decisions are legally binding in the
coming years. Even if the parliament decides that a policy
should not be changed in the next five years, a policy may still
be changed within the following year. Since the 2009 experi-
ence, the industry has been sceptical; thus, political promises
must be critically reviewed.
In the Ontario case, the reactions to the policy changes
have been mixed. The amount of FIT paid to renewable energy
 b i o m a s s a n d b i o e n e r g y 5 7 ( 2 0 1 3 ) 9 7 e1 0 5
producers has resulted in higher electricity costs for Ontario
power consumers; thus, changes that result in less money
being spent on solar power and that may result in lower
electricity prices are welcomed. People concerned about the
potential health and visual effects of wind turbines support
the cut-backs of this programme. In contrast, supporters of
green energy criticise that the policy flip-flops, claiming that
it will shake investor confidence and that no one will take the
government seriously when it promises industry assistance
[36]. One firm, Trillium Power Wind Corp., has filed suit
against the provincial government, citing losses of z4 M V
($5.3 M CDN converted at CDN .7878 V 18 Dec 2012) in
planning its first wind farm and over z1.5 million V ($2 billion
CDN converted at CDN .7878 V 18 Dec 2012) in future profits
when the government suddenly cancelled all offshore pro-
jects. John Kourtoff, Trilliums president, has said that the
change .destroys Ontarios credibility globally [37]. With
respect to the change in the solar policy, David Watts of Solera
Sustainable Energies said, It has shaken investments in
Ontario to the core [38].
The literature, as cited earlier in the paper, favours con-
sistent and ex ante policy approaches compared with frequent
changes in policy or an ex post approach in which policy is
chasing the current state of affairs. The two cases exemplify
the notion that policy inconsistencies cause problems for the
industry in both the short and long term. Profitable businesses
can rapidly be made unprofitable, and investments in the
future development of the industry can become more difficult
to obtain.
Managers in companies working with RESs must consider
their associated political risk. They must remain up to date
with the best information possible and not rely on advice from
idealistic interest groups and NGOs. One implication of the
unexpected changes in the policies in both Canada and Nor-
way may be the increased lobbying activity. Managers have
observed that large policy changes may suddenly occur, and
the industry must be aware of what is going on as early as
possible to influence the decision-making process to the
greatest possible extent.
A key demand of those who want to invest in RESs or
support such developments for social or environmental rea-
sons is the implementation of long-term stable policies that
minimise uncertainty. This finding is consistent with basic
economic theory, which states that uncertainty will have
a negative impact on investment. In their seminal work on
macroeconomic policy consistency, Kydland and Prescott [4]
found that where there were rational economic agents,
a consistent policy outperformed changing policies to suit the
given circumstances.
It is expected that policymakers will change their policies
because there are times when the circumstances change so
substantially that change is the only prudent course. However,
these changes should be as minimal and as infrequent as
possible. Ideally, policy changes should be synchronised with
evolving RES markets. We have observed a gap between the
political ambitions regarding bioenergy use and the actual use
in many countries [22]. One obvious reason for this finding is
that bioenergy has not been price-competitive due to its high
cost. Other reasons have emphasised the unwillingness of
policy-makers to establish markets and/or institutions that
103
will call for a price on carbon emissions [22]. However, the
importance of policy consistency has attracted less attention
among scholars.
As previously mentioned, we have found little research on
how firms should prepare themselves for policy changes
when developing their business plans. A potential research
agenda could include the following topics: How should the
market prepare for major shifts in policy? What is the role of
policy-makers and the government in the long-term devel-
opment of RES markets? What is the value of introducing
increased policy predictability for the actors in the market?
What actions can governments take so that policy changes
meet the criteria of being small and infrequent?
Unforeseeable events will require policy changes, but how
can the inconvenience be minimised by practicing due dili-
gence in the development of policies. For example, before the
announcement of FITs for different elements of a renewable
energy strategy, research could be performed to estimate the
expected uptake at different rates, i.e., the government could
calculate how much uptake they desire at their highest price
and then publish a formal schedule of lower incremental
prices at uptake prices beyond that level. Social acceptability
research could be conducted in advance of passing a policy on
wind power, given the challenges that all jurisdictions have
experienced in placing wind turbines in locations that will not
draw the ire of local residents. A good example of the effect of
a predictable policy is the evidence from the FIT in Germany.
The actors know that once a PV system is installed, the tariff
remains constant over a 20-year period. They are also aware
that if they wait one year to make their investment, they will
receive 5% less. This reduction also introduces a predictable
pressure on the PV industry to innovate and decrease the
costs of solar electricity [14].
Sufficient attention and research must be balanced against
the timely implementation of policies. Moreover, researching
a policy to the point that it is not implemented in a timely
manner is not acceptable. Governments are under pressure to
meet the demands of their constituents on current issues, so
they must carefully balance the need for sound policy with the
need for timely policy and weigh these needs against the
costs of suddenly changing a policy. This circumstance clearly
presents a great challenge. In this article, we presented evi-
dence from two case studies on the negative effects of large,
unexpected changes in RES policy. However, this article
presents only a brief case study, and additional research is
required to confirm the effects and to generate stronger con-
clusions pertaining to the value of a consistent RES policy for
the market actors and the government.
While the case studies do cross geographic boundaries and
renewable energy products, they do not and cannot represent
a comprehensive suite of case studies. For case studies of
Germany, France, Italy, and Spain see Campoccia et al. [41]
and for recent insight into United States solar policy see
Kwan [42]. To provide adequate detail to more studies would
result in a paper far too lengthy for presentation in this me-
dium. We do touch on other jurisdictions without going into
detail. For example, the United States is noted as at various
times in the paper as an example of inconsistent policy
making but we do not focus on it as a standalone study.
Similarly, Germany is held as an example of a jurisdiction that
104 b i o m a s s a n d b i o e n e r g y 5 7 ( 2 0 1 3 ) 9 7 e1 0 5
has benefited from consistent policy. Another interesting case
study in a Canadian context could have been done based on
the province of British Columbias revenue neutral carbon tax
which is an interesting contrast to Ontarios emphasis on FITs.
We note in the papers conclusion that more work needs to be
done in studying this issue, and case studies focussing on
these two countries would be examples of further work that
could be done.
Acknowledgement
The work for this paper was financed by the Norwegian
Research Council, project Bioenergy markets (grant number
192279/10). We would like to thank Sebastian Elbe of Sprint
GbR, Darmstadt, Germany, the anonymous reviewers, and
national and international participants at the Bioenergy
Market project workshops in Oslo in 2010 and 2011, for val-
uable feedback.
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