Understanding the drivers of energy capacity transitions: New evidence from a dual approach

Abstract

This study investigates the drivers of renewable energy capacity in 25 OECD countries from 1989 to 2019, with a particular focus on the complex role of oil prices in the energy transition. Given their strong correlation with major fossil fuels like coal and gas, understanding the impact of oil price shocks is crucial for shaping effective transition strategies. We examine this impact from a climate mitigation perspective, recognising it as a key dimension of a just transition. Unlike previous research, our approach suggests that policymakers, stakeholders, and investors should focus on two key areas to ensure a sustainable transition: promoting renewable energy capacity and reducing non-renewable energy capacity. We propose a dual-focus approach that acknowledges the importance of both enhancing renewable energy adoption and diminishing reliance on non-renewable sources. By identifying and leveraging both sets of drivers, policymakers and stakeholders can create more balanced and comprehensive strategies for energy transition. We categorise the drivers into four levels: (1) the interplay between oil prices, climate mitigation finance, and green innovation; (2) macroeconomic factors; (3) climate degradation; and (4) environmental management policies. Our results confirm our hypothesis by highlighting the role of certain drivers in reducing non-renewable energy capacity and certain others in promoting renewable energy capacity. Furthermore, our findings underscore the direct and indirect channels through which oil price dynamics influence the promotion of renewable energy capacity and reduction of non-renewable capacity, notably through the climate mitigation finance channel. This multifaceted approach aims to provide a deeper understanding of the various factors influencing energy transition and offer actionable insights for effective policy formulation.