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“Decreasing R&D Expenditures in the European Energy Industry and Deregulation,” by Olivier Grosse and Benoît Sévi

“Decreasing R&D Expenditures in the European Energy Industry and Deregulation,” by Olivier Grosse and Benoît Sévi

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Since the middle of the 1980s, particularly in Europe, the public energy expenditures on research and development (R&D) have slowed down noticeably. Meanwhile, the European deregulation of energy network activities and the consecutive restructuring of energy sectors have led companies to significantly reduce their R&D investments. What will be the consequences of the public and private declines in energy R&D on the output of new technical knowledge? We suggest that the private energy R&D restructuring in the long term might favor the exploitation strategies of companies to the detriment of their exploration strategies, thereby limiting the potential to develop new technologies that may deal with the global warming issue. We also examine whether specific incentives—intended to correct the present trend of energy R&D—have been and or should be implemented by the leading European countries. (This article was published as Olivier Grosse and Benoît Sévi, “Decreasing R&D Expenditures in the European Energy Industry and Deregulation,” The Journal of Energy and Development, volume 38, number 2 (spring 2013, copyright 2013), pp. 157–188.)
Since the middle of the 1980s, particularly in Europe, the public energy expenditures on research and development (R&D) have slowed down noticeably. Meanwhile, the European deregulation of energy network activities and the consecutive restructuring of energy sectors have led companies to significantly reduce their R&D investments. What will be the consequences of the public and private declines in energy R&D on the output of new technical knowledge? We suggest that the private energy R&D restructuring in the long term might favor the exploitation strategies of companies to the detriment of their exploration strategies, thereby limiting the potential to develop new technologies that may deal with the global warming issue. We also examine whether specific incentives—intended to correct the present trend of energy R&D—have been and or should be implemented by the leading European countries. (This article was published as Olivier Grosse and Benoît Sévi, “Decreasing R&D Expenditures in the European Energy Industry and Deregulation,” The Journal of Energy and Development, volume 38, number 2 (spring 2013, copyright 2013), pp. 157–188.)

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05/17/2014

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THE JOURNAL OF ENERGY AND DEVELOPMENT
Olivier Grosse and Benoît Sévi
,
“  
Decreasing R&D Expenditures in the European Energy Industry and Deregulation 
 ,”  
 
Volume 38, Number 2 Copyright 2013
 
DECREASING R&D EXPENDITURES IN THEEUROPEAN ENERGY INDUSTRYAND DEREGULATION
Olivier Grosse and Benoıˆ t
evi
*
 Introduction
I
t is often argued in economic literature that energy research and development(R&D) expenditures have been curtailed in response to liberalization policiesthat have been enacted in recent years.
1
The decrease in R&D budgets generally isaccepted without much further investigation or debate. In this paper we confirmthis trend of declining R&D by examining both private- and public-sector R&D budgets as well as output from innovations in European countries.Following Anglo-Saxon countries, previously regulated energy sectors in Eu-ropean countries have been opened to competition. The negative impact on theincentive for investment, which seems to be a direct consequence of deregulation,was only studied in the economic literature from the tangible investments angle
*Olivier Grosse is an Associate Professor of Innovation Economics, ISTOM, College of International Agro-Development. He holds a M.S. in the history of economic thought and a M.S.in industrial economics from Universit
e Paris-1 Panth
eon-Sorbonne. His research interests are in thetechnology innovation process of firms, in general, and of energy firms following deregulation,in particular.Benoıˆt S
evi is an Affiliated Professor of Energy Finance at IPAG Business School (Paris) and anAssociate Professor of Financial Economics at Aix-Marseille University. He holds a B.S. in energyeconomics and a M.S. in econometrics from Montpellier I University. His research interests are inthe energy markets and the modeling of volatility in these markets, as well as in the technologyinnovation process of energy firms following deregulation. He has published widely in international peer-reviewed journals such as
 Energy Economics
,
 Energy Policy
,
 Resource and Energy Economics
,
The Journal of Energy Markets, Environmental and Resource Economics
, an
 Ecological  Economics
, among others.
The Journal of Energy and Development 
, Vol. 38, Nos. 1 and 2Copyright
 
 2013 by the International Research Center for Energy and Economic Development(ICEED). All rights reserved.
157
 
(mainly in generation capacity). Generally, it is argued that investment disin-centives are related to uncertainty following the opening of markets to competi-tion. But analysis of the consequences of liberalization on R&D investments inEuropean countries and, particularly, on private budgets, are sparse. We aim to fillthis gap in the literature.Because our understanding of technical change and energy policy is by far incomplete—as argued by A. Sagar and J. Holdren—it is of interest to consider theevolution of R&D budgets in members of the Organization for Economic Co-operation and Development (OECD) where a greater portion of energy innovationtakes place.
2
Indeed, energy-sector restructuring is now taking place in countrieswell known for their R&D tradition, while innovation in the energy sector nowmust occur under the auspices of a liberalized framework.
3
In addition, the con-clusion in the article by N. Rose and P. Joskow that ‘‘
...
 large firms and investor-owned electric utilities are likely to adopt new technologies earlier than are their smaller and publicly owned counterparts’’ may not hold under more realistic as-sumptions, namely, that companies compete greatly for market shares and cus-tomer loyalty.
4
The role of technical change within the field of environmental economics re-cently has been surveyed in D. Popp et al.
5
The authors provide an exhaustivesurvey of the literature linking technical change with energy and environmentalconcerns for both the theoretical and empirical aspects. They note that:
Because the benefits of environmental technologies tend to accrue to society at large, rathethan the adopter of such technologies,
 market forces alone provide little incentive fordeveloping environmental technologies.
 Instead, environmental regulation or public fund-ing of research and development (R&D) often provides the first impetus for developing newenvironmental technologies. (Emphasis in bold added)
6
In the energy field, it is first relevant to investigate the trend in R&D investmentfrom private economic agents, which logically should have been limited due toregulation, and then investigate how a decrease in private R&D may have beencompensated for through public funding. That is precisely what we shall do in the present work about energy network industries in Europe following deregulation.We advance a series of reasons explaining why energy R&D budgets have beencut as a consequence of deregulation. One of the reasons is that the competitiveintensity seems to have a non-linear impact on innovation by firms (see P. Aghionet al.).
7
An inverted-U relationship between product market competition and in-novationcouldexplainaslowdownin R&Dactivityfora sectorlikeenergy,whichinitially is not very competitive (see R. Margolis and D. Kammen).
8
C. Blumsteinand S. Wiel noted that this consequence from restructuring was ‘‘unintended.’’
9
Indeed, it was implicit in the reforming process that the pursuit of profit should encourage innovation as well.
10
In light of P. Aghion et al.’s theory, the surprisingaspect of the evident decrease in energy R&D certainly should be discussed.THE JOURNAL OF ENERGY AND DEVELOPMENT158

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