Can local content requirements in solar auctions promote domestic innovation and production? Quasi-experimental evidence from India

As countries worldwide adopt renewable energy, governments can either decide to import or localize the production of components for renewable power plants. Local content requirements (LCR) in renewable energy auctions have been the most dominant policy tool to incentivize local production. Yet, there is little robust evidence about LCR’s effectiveness. Existing studies focus on framework conditions or qualitative evaluations based on anecdotal and aggregate, industry-level evidence. Taking advantage of a unique quasi-experimental setting in India where auctions with and without LCR were held in parallel from 2013-2017, we provide first counterfactual evidence of the effect of LCR on auctions’ participants production and innovation. We analyse data from 41 solar PV auctions in which 6 GW of capacity were allocated, generating a demand shock worth 8.65 billions USD in solar PV modules. While a naive ex-post comparison suggests LCR participants filed more solar patents, matched difference-in-difference estimates reveal participating or winning LCR auctions has no effect on firms’ solar patents and sales until three years after the end of LCR. We quantify and show that low competition in and an insufficient demand shock from LCR auctions likely explain why LCR did not induce firms to produce and innovate more.