The Effect of Renewable Energy Consumption on Current Account Balance: Panel Data Analysis

Abstract

Different resources of energy are unevenly distributed around the world. Not every country has energy resources of its own. Those that have, may experience inadequacy in meeting domestic demand. Countries have to import the needed energy regardless of the size of worldwide price fluctuations and crises that come into existence in the global marketplace, which works in favor of energy-exporting countries. Foreign dependence on energy negatively affects the current account balance. Energy importation has an important share in the current account deficit of non-oil-exporting countries, such as Türkiye, in which as a developing country with a young and growing population, energy demand is increasing, and new natural gas and oil reserves as well as renewable energy sources are sought in order to remove foreign dependency. This study aims to determine the effect of making use of renewable energy sources on the current account deficit for a selected sample of countries which consist of 12 European Union (EU) and International Energy Agency (IEA) members including Türkiye. A balanced panel data regression analysis was conducted using the data of these countries for the period of 2000–2022. As a result of the analysis with the Driscoll–Kraay estimator, it was observed that as the share of renewable energy sources in total energy consumption increases, a reducing effect is achieved in terms of current account deficit. As renewable energy technologies develop, countries will have access to energy. This will reduce their foreign exchange expenditure, decrease their current account deficit, and strengthen price stability and growth performance.

1. Introduction

Foreign exchange revenues and expenditures as a result of economic transactions carried out by residents in a certain period, generally within a year, are shown in the balance of payments, and as a section of it, the current account is the item in which goods and services are traded, and factor incomes and transfers are monitored.

The various causes of the current account deficit can be classified as structural, cyclical, temporary, or speculative [1]. Energy dependence, increased energy demand during the recovery phase of the economic cycle, and global shocks impact these four categories. Monetary, fiscal, and foreign trade policy choices, exchange rates, terms of trade, insufficient savings, interest rates, budget deficits, and dependence on imports for intermediate goods are some examples of the reasons for the current account deficit. Economic growth increases the current account deficit through rising demand for investment goods and purchasing power due to increasing per capita income [2]. As a part of raw material and intermediate goods import, foreign exchange expenditures on natural gas and oil contribute negatively to the current account balance. An increase in global price level and domestic demand during expansionary periods will result in rising expenditure on imported energy and current account deficit.

The relationship between energy and the current account deficit has been manifested by the sudden price increases in oil prices in the 1970s. While the increase in oil prices supports the foreign exchange stock of oil exporting countries, it negatively affects the current account balance of importing countries. From a microeconomic perspective, energy costs increase as energy prices and energy imports increase, while growth, current account deficit and inflation are affected from a macroeconomic perspective [3]. Especially in developing countries, rising energy demand can lead to significant current account deficits [4]. Since energy demand is inelastic, energy imports at high prices to meet the energy deficit negatively affect the current account balance.

Energy is one of the fundamental components of modern life. If energy demand cannot be met, production and consumption will be disrupted. Therefore, energy must be available as securely and continuously as possible, at the lowest possible costs.

Table 1. Current account balance and energy dependency indicators in selected countries.

Countries	Current Account Balance (USD Billion)	Energy Dependency (%)
Italy	−3.296	79.42
Spain	−2.415	74.34
Türkiye	−48.262	67.8
Poland	−28.787	46.02
Czech Republic	−12.698	41.79
Portugal	−2.876	71.27
Greece	−14.917	79.60
Hungary	−12.375	64.18
Slovakia	−4.115	69.63
Lithuania	−1.091	72.43
Latvia	−1.337	38.74
Estonia	−0.088	6

References: [7,8,9].

shows the current account balances and energy dependencies of the countries used in the study. European countries meet the majority of their energy needs through oil and natural gas via imports from Russia. The EU imports 25% of its oil from Russia [5] and is also dependent on Russian gas. Since the beginning of the conflict with Ukraine in 2022, as a response to sanctions, Russia has reduced gas supplies to the EU by up to 50% [6], despite existing production and transportation capacity. Natural gas shipments through the Nord Stream 1 and Yamal-Europe pipelines have been halted, and shipments to Moldova have been reduced. Additionally, the license for the Nord Stream 2 pipeline has been suspended. These developments led to a surge in natural gas prices in Europe, creating inflationary pressures, and increasing demand for alternative sources and coal. Europe is meeting its natural gas needs through LNG tankers from the United States (US) and increased natural gas imports from Norway.

Türkiye’s external trade balance is significantly influenced by energy and non-monetary gold. When these are excluded, the export-to-import coverage ratio is 98.8% [7]. In 2021, Türkiye’s dependence on imports for oil was 92.8%, while its dependence on natural gas imports reached 99.8% [10]. Due to the crises worldwide, investments have been made in Türkiye for coal-fired and hydroelectric power plants. The country also ranks among the top in Europe and the world in energy production from renewable sources in which investments are encouraged to reduce dependence on fossil energy sources.

After the US, the region with the highest nuclear energy production in the world is Europe with 31.5% [11]. In response to energy threats from Russia, the need for nuclear power plants has increased. The operational lifespans of existing nuclear plants have been extended.

The Asia-Pacific region leads the world in total renewable energy production, accounting for 46.2%, while Europe ranks second with 25.9%. In Europe, the growth of renewable energy sources is primarily driven by solar energy, followed by wind, biomass, and hydroelectric power. Three quarters of the development of renewable energy sources in Europe is attributed to Germany, Spain, the United Kingdom, Türkiye, France, the Netherlands, and Poland [12]. Policies such as setting long-term targets, competitive tenders in utility projects, consumption guarantees in solar energy and charging for excess production have a positive effect.

Considering the theoretical background, policies aimed at the accessibility, efficient use, and supply security of energy, which is an important input not only for production but also for consumption, come to the fore. The efforts to meet global energy demand with safe and clean sources, along with climate change and the problems it causes has forced countries to develop new technologies and implement strategies in this direction. Hardly any sector operates without using energy. Thus, various sectors contribute to innovations in energy efficiency and low-carbon targets. Research and development in this area enhances competitiveness and reduces environmental problems.

Population growth and technological developments in developing countries are increasing demand for energy and requiring uninterrupted supply [13]. The development of renewable energy technologies reduces energy dependence, ensures energy security, and redirects funds allocated for fossil fuels to education and health care within the country, thereby creating more resources for a skilled workforce. The importance of energy for sustainable growth and development is highlighted in a broad perspective under the seventh goal of the United Nations (UN) 17 Sustainable Development Goals (SDGs), under the title of “Affordable and Clean Energy”. Within this framework, the goal is to “ensure access to affordable, reliable, sustainable, and modern energy for all” [14]. A significant increase in the renewable energy share in the global energy sources has been targeted. Promoting infrastructure and technologies for clean energy research, and energy efficiency are aimed.

For countries facing structural and/or chronic current account deficits mostly or partly due to the financing energy imports and price volatility in international markets, renewable resources are seen as a functional option.

This study aims to determine the effect of renewable energy consumption by replacing fossil energy sources and being less import-dependent on reducing the current account deficit. Following the introduction, Section 2 reviews the literature and Section 3 presents the model, analysis, and findings. Section 4 discusses the results and makes recommendations for future studies. Section 5 provides the conclusions and policy implications.

2. Literature Review

The causes of the current account deficit are often discussed, focusing on variables such as energy consumption, energy imports, oil prices, exchange rates, growth, and trade deficits. In addition to specific studies conducted for Türkiye, analyses have also been carried out for Organization for Economic Cooperation and Development (OECD), G20, and various country groups. However, there are few studies examining the relationship between the current account balance and renewable energy, which has mostly been analyzed in terms of its interaction with economic growth.

Ref. [15] tested the relationship between crude oil trade and the current account balance for 91 countries over the period from 1984 to 2009 using panel data analyses. The findings indicated that net oil exports explained the current account surplus; however, net energy imports did not have a significant effect on the current account deficit.

Ref. [16] investigated the impact of energy consumption from renewable and non–renewable sources on international trade and real gross domestic product (GDP) for 69 countries over the period of 1980–2010. The results of the short–-term causality analysis indicated a bidirectional relationship between GDP and trade, as well as a bidirectional interaction between non-renewable energy consumption and trade. However, unidirectional causality was found from renewable energy consumption to trade. According to the panel cointegration test results, there is also bidirectional causality in the long term. It was determined that both renewable and non-renewable energy consumption and foreign trade have a positive effect on economic growth in the long term.

Ref. [17] investigated the causality between macroeconomic variables affecting the current account deficit in Türkiye. Using quarterly data from 2003:1 to 2014:2, they applied conditional and partial Granger causality tests. The results indicated that the real effective exchange rate has the most significant impact on the current account deficit, followed by growth and energy imports.

Ref. [18] aimed to demonstrate the impact of alternative energy sources on the current account deficit. The Granger Causality Test results indicated that the real effective exchange rate and GDP are Granger causes of the current account deficit; however, no relationship was found between renewable energy production and the current account deficit.

Ref. [19] try to explain the impact of oil imports on the current account deficit using data from 11 OECD countries that hold a 90% share in Türkiye’s trade with the EU, covering the period from 2000 to 2013. The study concludes that increases in GDP, the level of financial development, and crude oil prices have a positive effect on the current account deficit. However, the relationship between inflation rate and current account deficit was found to be insignificant.

Ref. [20] aimed to explain the impact of renewable energy consumption on the current account balance for 27 EU countries and Türkiye, excluding Malta, using panel data analysis. The variables included the ratio of the current account balance to GDP, the percentage of total energy consumption represented by renewable energy sources, the annual growth rate of GDP, the real effective exchange rate, the ratio of savings to GDP, and the percentage of energy imports in total energy consumption. The analysis concluded that an increase in renewable energy consumption has a positive effect on the current account balance.

Ref. [21] conducted a panel data analysis to examine the impact of energy imports on economic growth and the current account deficit using energy import data, current account balance, and fixed GDP in U.S. dollars for the period from 2000 to 2017. The findings revealed that energy imports increase both economic growth and the current account deficit.

Ref. [22] used data for the period 1990-2017 for Brazil, India and Türkiye, which are net energy importers, and the variables of the share of current account balance in GDP, the share of electricity generation from renewable energy in total electricity generation and the share of energy imports in total energy use. In the short run, except for Brazil, there is no statistically significant contribution of renewable energy to the current account balance. A 1% increase in energy imports has a negative impact on the current account balance. According to Türkiye’s Granger causality analysis, there is unidirectional causality from energy imports to the current account balance.

Ref. [23] conducted a Toda-Yamamoto causality analysis to explain the relationship between the current account deficit and energy imports, using data from Q1:1998 to Q3:2019. The variables included net energy imports, the current account deficit, GDP, and crude oil imports. The analyses found a bidirectional relationship between the current account deficit and net energy imports. Additionally, a unidirectional relationship was identified from crude oil imports to the current account deficit and net energy imports, as well as from GDP to crude oil imports.

In summary, the existing literature indicates that while the impact of renewable energy consumption on the current account balance is weak, there are varying findings regarding the relationships between energy production, consumption, and imports with the current account balance, depending on the sample, period, and methodology used.

3. Model, Analysis and Findings

This study analyzes the impact of renewable energy consumption on the current account deficit with the data of selected petroleum importing countries for the period of 2000 to 2022, making use of the model in Equation (1) designed to explain the relationship between the variables.

CAB_i = β₀+ β₁ REC + β₂ ESS_i+ β₃ GDP_i+ β₄ WEP_i + u_i

(1)

The dependent variable of the model is the current account balance (CAB), while renewable energy consumption (REC), gross domestic product (GDP), which is noted in the literature as affecting current account deficit, as well as world energy prices (WEP) and energy self-sufficiency (ESS) have been included in the model as independent variables. Information about the dataset is presented in

Table 2. Variables and data sources.

Variable	Definition	Source
Current Account Balance (CAB)	Share in GDP, annual (%)	IMF Data
Renewable Energy Consumption (REC)	Consumption of renewable energy sources/Total consumption, (%)	Eurostat (For Türkiye, 2022 data obtained from MENR)
Energy Self-Sufficiency (ESS)	Total energy production/Total consumption, (%)	Eurostat (For Türkiye, 2022 data obtained from MENR)
Gross Domestic Product (GDP)	Annual growth rate (%)	IMF Data
World Energy Prices (WEP)	Average of spot crude oil prices and natural gas price indices (2016 = 100)	IMF Data

.

Twelve countries that are members of the EU and IEA, and dependent on fossil fuel imports, with current account deficits, have been included in the sample, namely Türkiye, Italy, Spain, Greece, the Czech Republic, Poland, Portugal, Estonia, Latvia, Lithuania, Slovakia, and Hungary. Panel Regression Analysis has been applied to the model using Stata 17.

In panel data analyses, unit-specific or worldwide shocks may occur depending on time. For this reason, whether there is a structural break within the dataset needs to be determined, firstly. It was considered that there would be breaks during the 2008 Global Economic Crisis, the European Debt Crisis in the same period, the Brexit referendum in 2016 and 2020, and the 2020 COVID-19 pandemic. To identify the number and dates of structural breaks, the Supremum Wald test developed by [24] was employed. According to the test result, a break was estimated in 2009. Dummy variables were added to the model for both the constant and the slope as 0 before 2009 and 1 after 2009. While there was no break in the constant, a break in the slope was detected and added to the following model:

CAB_i = β₀ + β₁ REC + β₂ESS_i + β₃GDP_i + β₄ WEP_i + β₅DGDP + u_i

(2)

F Test, LR Test, and LM Test were applied to identify unit and time effects. Based on the results presented in

Table 3. Determination of unit and time effects and model selection.

Tests	Unit and Time Effects	Unit Effect	Time Effect
F Test	7.99 (0.000)	12.06 (0.000)	4.91 (0.000)
LM Test	-	73.12 (0.000)	31.31 (0.000)
LR Test	85.96 (0.000)	56.79 (0.000)	28.95 (0.000)
Mundlak Test	Prob > chi2 = 0.0147

, the existence of the classical model is rejected, and both unit and time effects are shown to be present in the model, which is a two-way one.

In this study, the Mundlak Test, providing more effective results when there is changing variance and inter-group correlation, is used. The main hypothesis is ‘H₀: There is no correlation between explanatory variables and error term. There are both fixed and random effects. The random effects model is valid’ and the alternative hypothesis is ‘H₁: There is correlation between explanatory variables and the error term. The fixed effects estimator is valid’. Since the critical value is less than 0.05, the null hypothesis H₀ is rejected. It is accepted that there is a relationship with time-invariant, unobservable variables in the model, and the validity of the fixed effects model is accepted [25].

The model is constructed as a two-way fixed effects model. The last version of the model is given in Equation (3):

CAB_it = β₀ + β₁ REC_it + β₂ESS_it + β₃GDP_it + β₄ WEP_it + β₅DGDP_it + µ_i + λ_t + u_it

(3)

Before proceeding with the analysis, the existence of deviations from the basic assumptions was tested. The test results are presented in

Table 4. Tests of fundamental assumptions.

Heteroscedasticity	Modified Wald Test: 106.65 (0.000)
Autocorrelation	Adjusted LM Test: First Order: 7.78 (0.000) Second Order: 5.24 (0.000)
Inter-Unit Correlation	Breusch-Pagan LM Test: 245.032 (0.000)
Normal Distribution	Jarque-Bera Test: 3.376 (0.1849) D’Agostino, Belanger ve D’Agostino Test: Skewness: 0.0729 Kurtosis: 0.5049 Prob > chi2: 3.68 (0.1585)
Specification Test	Debenedictis-Giles ResetS1 Test: 1.013 (0.3647) Debenedictis-Giles ResetS2 Test: 0.554 (0.6959) Debenedictis-Giles ResetS3 Test: 0.629 (0.7071)

. In order to test the variance varying across units with the modified Wald test, the null hypothesis is H₀: Variances are equal variance across units, and the alternative hypothesis is H₁: Variances vary across units. According to the changing variance test result in Table 4, the null hypothesis H₁ is rejected, and it is accepted that there is changing variance in the model.

Since T > N, the bias-corrected LM test is used for the autocorrelation test. First and second order autocorrelation is tested, where H₀: “there is no first order autocorrelation” and H₁: “there is first order autocorrelation”. The same hypotheses were formulated for testing both first and second order autocorrelation. Rejecting the H₀ hypothesis, it is concluded that there is first and second order autocorrelation in the model.

One of the fundamental assumptions of panel data analysis is that the error terms are independent across units [26]. The null hypothesis and alternative hypothesis were formulated as ‘H₀: There is no correlation between units’ and ‘H₁: There is correlation between units,’ and tested using the Breusch-Pagan LM Test suitable for T > N. The null hypothesis H₀ was rejected, leading to the conclusion that there is correlation among the units.

In order to test the normal distribution of error terms, the Jarque-Bera Test and the D’Agostino, Belanger, and D’Agostino Test were applied. The null hypothesis for skewness is stated as H₀: S = 0, and for kurtosis as K = 3. The null hypothesis could not be rejected, indicating that the error terms are normally distributed. According to the DeBenedictis-Giles Reset Test, there is no specification error in the model.

Issues of heteroscedasticity, autocorrelation, and inter-unit correlation were detected in the model. To address these issues, the Driscoll-Kraay estimator, which is robust against these problems, were used. During model estimation, dummy variables for year effects and the slope break (DGDP) were included. In order to shorten the table, dummy variables are not included in

Table 5. Findings of the analysis.

Dependent Variable (CAB)	Coefficient	Standard Error	T-Statistic	Probability
REC	0.2286409	0.0916948	2.49	0.021 *
ESS	0.0441413	0.013927	3.17	0.004 *
GDP	−0.5151067	0.0876224	−5.88	0.000 *
WEP	−0.0041183	0.0018146	−2.27	0.033 *
Constant (β0)	−7.710923	0.8725621	−8.84	0.000 *
Observations	276
Max. Lag Length	2
F Statistic	888.0	Prob > F: 0.000
R2	0.6398

* 95% confidence intervals.

.

The model has an R² value of 0.64 and is statistically significant according to the F statistic. An increase in one unit in the share of renewable energy consumption (REC) will positively affect the current account balance, resulting in an increase of 0.23 units. This proportional increase will be effective in reducing the current account deficit.

A one unit increase in the ratio of production to consumption (ESS) will lead to an increase of 0.044 units in the current account balance. This suggests that an increase in energy resources and production will enhance the ratio of consumption being met domestically, thereby reducing dependence on external energy sources, and positively impacting the current account balance.

A one-unit increase in world energy prices (WEP) will decrease the current account balance by 0.004 units. Rising oil and natural gas prices will lead to greater outflows of foreign currency for energy-importing countries. Unless the same amount of foreign currency spent or more returns to the country, a current account deficit will occur.

A one-unit increase in gross domestic product (GDP) will lead to a decrease of 0.515 units in the current account balance. Increasing demand for intermediate goods and consumption goods during the growth process will adversely affect the current account balance.

4. Discussions

In this study, a panel data regression analysis was conducted to determine the effect of the use of renewable energy resources on the current account deficit. To test the robustness of the model, the Supremum Wald structural break test was first applied. The appropriate model was then determined by comparing fixed and random effects models using F, LR, and LM tests. Unlike the Hausman test, the Mundlak test —which can be used when errors are heteroscedastic or exhibit inter-unit correlation —supported the fixed effects model. The validity of the assumptions was tested using the following tests: the Modified Wald Test for heteroscedasticity; the Adjusted LM Test for autocorrelation; the Bruesch–Pagan LM Test for inter-unit correlation; and the Jarque–Bera Test for normal distribution. The functional structure of the model was evaluated using the Debenedictis–Giles RESET Test. The Driscoll–Kraay standard error estimator was ultimately chosen for estimating the two-way fixed effects panel regression model due to its robustness against deviations from the assumption in panels with T values greater than N.

As a result of the analysis using the data of 11 EU and IEA member countries and Türkiye for the period of 2000–2022, when investments in renewable energy are more prominent, it is concluded that energy consumption from renewable sources will have a reducing effect on the current account deficit. The findings are consistent with those in reference [20] but differ from those in reference [18]. Reference [20] examined the relationship between variables using a panel data regression analysis. Meanwhile, [18] applied a causality analysis, focusing on the causal relationship between the current account deficit and renewable energy production. The results of the study are similar to those of [20] because it used panel data analysis and was applied to EU member states.

In line with the theoretical expectation, the increase in the ratio of energy production to consumption also has a reducing effect on the current account deficit. This is because a decrease in imports needed to meet domestic demand will reduce dependency on external sources, and consequently, foreign currency expenditures.

Economic growth represented by the changes in GDP will have a negative impact on the current account deficit, as it leads to increased production, demand for imported inputs, and energy consumption. Therefore, there is a need to develop domestic alternatives that can replace imported intermediate goods and energy sources.

As expected, the rise in global energy prices contributes to an increase in the current account deficit. Even if the quantity of energy imports remains the same, the higher energy prices result in more foreign currency leaving the country. To prevent an increase in the current account deficit, an equivalent amount of foreign currency must flow into the country.

While this analysis has included variables that have been significant in other studies, it has omitted certain relationships. Each renewable energy source is affected by different conditions. The model can be adjusted to include variables that affect countries’ renewable energy production differently, such as solar irradiance, wind potential, hydrological capacity, physical terrain and location constraints, and feed-in tariffs. Individual analyses and causality analyses between variables can be applied to countries. Lagged effects can be tested to account for the time it takes for renewable energy investments to impact trade balances.

5. Conclusions

With the energy crises of the 1970s, production processes and the products offered for consumption were revised in the context of energy demand. As a result of inflationary consequences as well as the current account balance effects of increasing energy costs and increasing international search for solutions in the face of fossil fuel -induced environmental destruction based on the rising social concerns, an orientation towards renewable energy resources in line with the aim of sustainability has been placed on the agenda.

While the effects of renewable energy production or consumption on economic growth have been widely analyzed in the literature, the debates over the effects on current account balance are limited. In this respect, the countries in the sample of this study, which is designed to contribute to the related field, do not have sufficient oil and natural gas reserves to satisfy domestic demand. Deprived of fossil resources, European countries are relatively more advantageous in terms of renewable energy resources. Pushed by the lack of non-renewable resources and climate change, the production of these resources is developing especially in Italy, Spain, and Türkiye, which stand out with their ability to develop related technology. Europe comes right after the Asia-Pacific region in energy production from renewable sources.

Türkiye has serious current account deficits due to energy imports. Since the first years of the Republic, policies to solve the energy problem have been emphasized. With a national strategy adopted and policies implemented in order to make use relatively high potential thanks to the geographical location, Türkiye is expected to reduce its current account deficit. Dependence on foreign sources, which was as high as 74% in the past years, recently decreased to 68%, with the discovery and utilization of new reserves, and the increase in renewable energy investments [27].

To solve the current account deficit problem, which is also affected by energy imports, energy-dependent countries, including Türkiye, should, on the one hand, emphasize energy conservation by raising social awareness and, on the other hand, work to increase energy efficiency. They should increase their efforts to identify reserves for fossil resources and make them ready for utilization by developing domestic and international joint initiatives.

In addition to fossil resource investments, the incentive mechanism should be used effectively to develop renewable energy resources and increase their share in production and consumption; resources suitable for climate and geographical location should be identified. National capabilities and competitiveness against the increasing interest in clean energy after the Paris Agreement should be strengthened by producing the necessary tools domestically. Thus, considering that non-renewable resources will eventually be depleted, and in preparation for the effects of regulations such as carbon neutrality and the Green Deal, the development of renewable energy technologies will provide access to energy, reduce the current account deficit, and offer an environment-friendly alternative to fossil fuels, which negatively impact the environment.

Türkiye has an advantage compared to the other countries in the sample as it is a neighbor of countries rich in oil and natural gas. It can gain not only in terms of finding reserves but also by building an energy bridge between Europe and energy exporting countries. In addition, the geographical characteristics of the country allow the utilization of various renewable resources. Apart from the export of energy from discovered fossil and renewable resources, plans should be made to gain from the trade of the tools needed for the production and consumption of renewable energy.

It is of critical importance that long-term strategies and policies based on them are consistently monitored and updated when necessary to strengthen national and domestic capabilities. Instead of importing fossil-based energy, moving toward renewable sources will be promoted, and the related technology will be exported. Countries that are able to produce the energy needed in their production and consumption processes will save on foreign exchange expenditure; while the current account deficit will decrease, price stability and growth performance will be strengthened.