Financial Sector Development and Energy Transition: Does Regulatory Quality Matter?

Abstract

This study examines the effects of financial sector development and regulatory quality in driving the energy transition using Regulatory quality (RQ) as a moderator. The study employs a panel method, pooling data from 43 African countries, spanning from 1990 to 2022, sourced from the World Development Indicators (WDI) of the World Bank. In order to take care of the possibility of endogeneity, the study employs the dynamic generalized method of moments (GMM) approach developed by Arellano & Bond, 1991. The model shows the impact of the independent variables on renewable energy consumption. The results show that financial development has a negative significant impact on the demand for renewable energy. RQ is also observed to have a significant negative effect on the demand for renewable energy. The interaction between Financial development and regulatory quality (FIND*REGQ) yield positive effect on renewable energy demand. This implies that strong regulatory frameworks enhance policy credibility, reduce regulatory uncertainty, and improve contract enforcement, thereby increasing investor confidence in renewable energy markets. Both FDI and Trade openness have negative significant impact on the demand for renewable energy. The study recommends that there is the need to strengthen regulatory frameworks, enhance transparency and accountability, foster collaboration between regulatory agencies and industry stakeholders and promote investments in clean energy technologies.

JEL: Q43, G28, O44