Is the energy transition ready for declining budgets in RD & D for fossil fuels? Evidence from a panel of European countries

To meet their climate targets, European countries have sought to move from fossil fuels to clean energy. Some of the major elements in this energy transition have involved cutting investment in fossil-fuel generation, decommissioning coal-fired power plants, and increasing investment in technological innovation in energy sources, mainly through Research, Development and Demonstration (RD & D). A large part of these, predominately public, RD & D budgets has been assigned to Renewable Energy Sources (RES), while the potential benefits during the transition of technological innovation in fossil-fuel technology have largely been disregarded. The current limitations of RES, such as their intermittency, dependency on weather conditions and lack of effective storage, mean that, in the absence of viable alternatives, fossil fuel energy sources will continue to play a crucial role in ensuring the supply of electricity for some time. Investing in innovation is clearly important for tackling climate change, but a proper understanding of the broader economic and social implications of this investment should consider the entire energy sector, and not be limited to RES. Thus, this study sets out to assess the impact on electricity prices of public RD & D investment in both RES and fossil fuels. To do this, a Feasible Generalised Least Squares model was applied to a panel of 10 European countries using annual data from 2008 to 2021. Our findings provide empirical evidence that public spending on RD & D for fossil-fuel technology reduced electricity prices for households by 0.0028% and for industry by 0.0059%, whereas public spending on RD & D for RES technology seemed to increase household electricity prices by 0.0049%. These findings may be explained by the relative maturity and competitiveness of the respective energy types, which crucially affect the ease with which new technologies are adopted and commercialised.

Automated summary

In order to achieve climate targets, European countries are transitioning from fossil fuels to clean energy. This study examines the impact of public RD&D investment on electricity prices, focusing on both renewable energy sources (RES) and fossil fuels. The findings show that while RD&D investment in fossil-fuel technology reduced electricity prices for households and industry, RD&D investment in RES technology seemed to increase household electricity prices. These results highlight the importance of considering the broader economic and social implications of investment in the energy sector.