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

This study investigates how residential solar PV adoption responds to changes in electricity prices. We shed light on the importance of a house(hold) characteristic that has been overlooked in the literature on energy-saving investment: the distinction between retrofit and new-build installations. To identify the effect of potentially endogenous electricity prices, we regard the 2011 Fukushima nuclear accident and subsequent shutdown of nuclear power plants in Japan as a natural experiment that caused substantial exogenous variations in electricity generation costs. Using Japanese data for 2009–2014, we find that higher electricity prices increase solar PV installations on existing homes (with the mean elasticity of 1.6), while we cannot find a significant effect for new-build homes. An important policy implication of the contrasting responses is that subsidy schemes for energy-saving building technologies can be made more cost-effective by targeting retrofits. We also find large downward bias (40–60%)
if cost-shifter instrumental variables are not used to control for the endogeneity of electricity prices.