Research

Local content requirements in auction schemes for renewable energy: Enabler of local industrial development in developing countries?

In UNEP DTU Partnership Working Paper Series 2019, 2019

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Abstract

Given the increasing cost-competiveness of renewable energy (RE) technologies, competitive auction schemes have increasingly been adopted in recent years across various developed and developing countries. Local content requirements (LCRs) are frequently used as part of RE auction schemes to promote local industrial development. In this paper, we present a review of the literature on the effectiveness of LCRs in fostering local industrial development across various developing countries, focusing on South Africa, Brazil, India and China. Specifically, the paper analyses the effectiveness of LCRs in promoting the establishment of local manufacturing facilities of onshore wind turbine and solar PV omponents in these countries. Further, the paper provides a review of the main determining factors stressed in the literature to account for variation in the effectiveness of LCRs. We find that the literature generally ascribes importance to the role of LCRs in stimulating local component production in developing countries. However, previous research on the effectiveness of LCRs in establishing local component manufacturing differs across the technologies and the countries analysed. The variation in the effectiveness of LCR can be explained by a framework that combines the following four determining factors: (i) market size and stability; (ii) policy design and coherence; (iii) the restrictiveness of the LCRs; and (iv) the domestic industrial base. The paper highlights a lack of systematic approaches and rigor in existing research, thus proposing the development of a common framework and a set of indicators to assess the efficiency of LCRs.