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 THE EUROPEAN ENERGY INDUSTRY AND DEREGULATION
ˆt Se vi* Olivier Grosse and Benoı

Introduction t is often argued in economic literature that energy research and development (R&D) expenditures have been curtailed in response to liberalization policies that have been enacted in recent years.1 The decrease in R&D budgets generally is accepted without much further investigation or debate. In this paper we confirm this 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 European countries have been opened to competition. The negative impact on the incentive 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 the technology innovation process of firms, in general, and of energy firms following deregulation, in particular. Benoı ˆt S evi is an Affiliated Professor of Energy Finance at IPAG Business School (Paris) and an Associate Professor of Financial Economics at Aix-Marseille University. He holds a B.S. in energy economics and a M.S. in econometrics from Montpellier I University. His research interests are in the energy markets and the modeling of volatility in these markets, as well as in the technology innovation 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, and Ecological Economics, among others. The Journal of Energy and Development, Vol. 38, Nos. 1 and 2 Copyright Ó 2013 by the International Research Center for Energy and Economic Development (ICEED). All rights reserved.

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(mainly in generation capacity). Generally, it is argued that investment disincentives are related to uncertainty following the opening of markets to competition. But analysis of the consequences of liberalization on R&D investments in European countries and, particularly, on private budgets, are sparse. We aim to fill this 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 the evolution of R&D budgets in members of the Organization for Economic Cooperation and Development (OECD) where a greater portion of energy innovation takes place.2 Indeed, energy-sector restructuring is now taking place in countries well known for their R&D tradition, while innovation in the energy sector now must occur under the auspices of a liberalized framework.3 In addition, the conclusion in the article by N. Rose and P. Joskow that ‘‘. . . large firms and investorowned electric utilities are likely to adopt new technologies earlier than are their smaller and publicly owned counterparts’’ may not hold under more realistic assumptions, namely, that companies compete greatly for market shares and customer loyalty.4 The role of technical change within the field of environmental economics recently has been surveyed in D. Popp et al.5 The authors provide an exhaustive survey of the literature linking technical change with energy and environmental concerns for both the theoretical and empirical aspects. They note that:
Because the benefits of environmental technologies tend to accrue to society at large, rather than the adopter of such technologies, market forces alone provide little incentive for developing environmental technologies. Instead, environmental regulation or public funding of research and development (R&D) often provides the first impetus for developing new 6 environmental technologies. (Emphasis in bold added)

In the energy field, it is first relevant to investigate the trend in R&D investment from private economic agents, which logically should have been limited due to regulation, and then investigate how a decrease in private R&D may have been compensated 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 been cut as a consequence of deregulation. One of the reasons is that the competitive intensity seems to have a non-linear impact on innovation by firms (see P. Aghion et al.).7 An inverted-U relationship between product market competition and innovation could explain a slowdown in R&D activity for a sector like energy, which initially is not very competitive (see R. Margolis and D. Kammen).8 C. Blumstein and 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 surprising aspect of the evident decrease in energy R&D certainly should be discussed.

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We examine the R&D intensity of the 14 major companies in energy generation or gas distribution in Europe. We have some reason to think that the panel is relevant to our analysis because no R&D seems to occur for smaller firms in the same industry. As our focus is on the impact of liberalization, we only consider firms in the electricity industry or gas distribution and not oil. To the extent of our knowledge, only two papers—A. Sterlacchini and T. Jamasb and M. Pollitt—provide evidence of R&D budget decreases at the firm level.11 Our paper differs from these articles on at least five points. First, our panel is larger and the period of the study is longer. Second, we use patent data to confirm the trend in R&D output by firms. Third, we complete our analysis by examining public R&D budgets to investigate the nonsubstitution of public funds for private funds. Fourth, we offer an in-depth survey and discussion of the consequences of reduced R&D expenditures on the research potential of companies in the mid and longer term. Fifth, we review some of the incentive policies that actually have been implemented in some European countries to modify the observed trend. Despite some of these aspects having been considered separately and rarely for Europe, we offer the first unified study integrating R&D budgets from both the private and public sectors as well as patents to examine energy R&D in Europe comprehensively. An analysis of energy R&D budgets in Europe is of interest in several respects. First, because energy generation is by far the industrial sector with the most emissions, there is an obvious link between energy production and environmental concerns. The main issue is that any efficient technological path in the field of energy and the environment today should allow for long-term sustainable development. As asserted in J. Dooley, we now face a ‘‘dual challenge’’ of liberalization and climate policy.12 Second, following the United Nations Educational, Scientific and Cultural Organization’s (UNESCO’s) observation, about 2 billion people do not have regular access to electricity yet. Even though electricity generation is a source of pollution, it is recognized as a factor of development, which has strong implications for food and nutrition, the medical-related domain, education, and quality of life. Thus, the international community faces an accessibility-sustainability dilemma, which calls for the adoption of less-emitting technologies in the future. Furthermore, this supports the development of more efficient technologies to save, stock, and transport energy. Third, the need to maintain innovative activity may be crucial with respect to the European technological ambition. As highlighted in A. Sterlacchini, how could Europe succeed in reaching its Lisbon 3-percent goal if major companies reduce their R&D effort?13 Additionally, investment in energy R&D is essential to create and maintain a competitive position in the energy innovative industry (cf. the position of German firms in wind energy).

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To address the different issues highlighted above, we first proceed by advancing the following two questions: how have private energy R&D budgets evolved over the past years? And, are governments still supporting energy R&D? We argue that R&D budgets were decreased dramatically. For the private sector, budgets have been cut in response to liberalization. As far as governments are concerned, budgets have declined because of political choices and budgetary constraints. Despite the fact that we are mainly interested in ‘‘in-house’’ innovation activity, we examine public energy R&D budgets in order to investigate a potential substitution effect between public and private R&D. Using publicly available figures from the International Energy Agency (IEA), we confirm a dramatic decline for all European countries but one. We discuss the necessity of a strong public R&D in a sector where competition precludes self-regulation. Of course, public funding may be viewed as a substitute for private funding and not as a complement (see E. Mansfield and L. Switzer for an early study in the oil industry).14 By financing R&D projects, the government may ‘‘crowd out’’ privatesector R&D, thereby providing a negative externality. P. David et al. surveyed the empirical evidence and their findings are quite ambiguous.15 Indeed, the energy sector has a somewhat particular framework in that it recently has been deregulated and the systems at work are very large (see J. Markard and B. Truffer).16 D. Popp et al. also note that ‘‘government R&D can compensate for underinvestment by private firms.’’17 We empirically explore this issue in the third section of the paper where government R&D investment is examined over the same period as that dedicated to the analysis of private budgets. Government support is of particular importance due to long-term outcomes of innovative activity, greater uncertainty to the competitive framework, and the public nature of knowledge outcome, in addition to the well-known decisive impact of governmental funding to support R&D at the early stage (see L. Branscomb and P. Auerswald).18 An investigation of the impact of liberalization on R&D activity may be conducted through an event study. Unfortunately, this is not possible in the present case as only one event exists in each country and the observation period under consideration should take into account that companies may have anticipated the deregulation process and acted accordingly (see C. Defeuilley and A. Furtado).19 Such an empirical exercise is in the work by P. Sanyal, where data at the micro (firm) level are used to assess the impact of regulatory framework (deregulation is effective or not) on the innovative activity of the firm.20 That paper finds that deregulation has resulted in a decrease in R&D. But in the U.S. case, different situations for various states give robustness to the analysis. This would not be the case for Europe. Not all research has reached the same conclusion that there has been a decrease in R&D activity or output in the face of liberalization and reforms (see G. De Martino Jannuzzi).21 To the best of our knowledge, only two works of research

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show an increase in innovative activity: J. Markard et al. and V. Jacquier-Roux and B. Bourgeois.22 The former is based on a survey of firms and concerns two very specific sectors of energy generation: green power and fuel cells. Indeed, both these segments of power generation are remarkable in that they were at such very low levels of initial investment and are strategic activities for companies. As such, they hardly could be generalized as R&D investments as a whole. The latter article found a significant increase in the number of patents granted over the period 1985 to 1998 for energy producers and equipment suppliers. Our results are different because we mainly are interested in the impact of the restructuring process on the innovative activity of firms that are the main actors in this process (‘‘major utilities’’). In addition V. Jacquier-Roux and B. Bourgeois do not address the issue of R&D budgets but focus on the imperfect output represented by the granted patents.23 This paper proceeds as follows: the upcoming section provides evidence of a strong decline in ‘‘in-house’’ R&D for major companies in Europe. We hereby include an interpretation of this decline in terms of innovation production in the energy sector. In the subsequent section we confirm that this decline is not compensated for at the country level. This is followed with an examination of some of the incentives used by governments to stimulate energy R&D. The final section provides some concluding remarks.

Liberalization and the Innovative Activity of European Energy Firms We first begin with an examination of R&D budgets for 14 major companies in the electricity and gas industries in Europe and then we measure their innovative output under the imperfect form of patents granted. Both for budgets and patents, we provide a discussion of expected effects in the short-, medium-, and long-term horizons. Decrease in R&D Expenditures: R&D budgets as well as net sales are collected for major utilities in Europe. Data are extracted from the firms’ annual reports. As in A. Sterlacchini, we verify data reported on the Form 20-F submitted to the Security and Exchange Commission. In all cases, data are concordant. The 14 firms finally constituting our panel include: Suez (France), Electricit e de France (France), Gaz de France (France), EnBw (Germany), Eon (Germany), RWE (Germany), Enel (Italy), Scottish Power (United Kingdom), British Energy (United Kingdom), Scottish and Southern (United Kingdom), Union Fenosa (Spain), Iberdrola (Spain), Endesa (Spain), and Vattenfall (Sweden). These are major actors in the European energy sector when the oil industry is excluded. Their sales range from around 4.5 billion euros for British Energy to about 60 billion euros for Electricit e de France. Oil companies are omitted from our

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analysis because of both the absence of deregulation in this sector during recent years, which is precisely the issue that we want to investigate, and the difficulty in disentangling R&D dedicated to exploration from total R&D due to the strategic features of these figures for oil companies.24 Using net sales and R&D expenditures, we compute for each year and for each firm the R&D intensity as the ratio of the latter to the former. It appeared relevant to focus on R&D intensities instead of budgets in absolute values because of the very different trajectories of the companies’ turnovers. In addition, R&D intensity is a measure, although not perfect, of the effort made by the firm of its innovation activity (A. Sagar and B. van der Zwaan also resort to this metric with energy R&D for public R&D).25 The results are presented in figure 1, which is similar to figure 2 in T. Jamasb and M. Pollitt, but with a panel composed of a greater number of companies and over a longer research period when possible.26 First, our figures show that energy is a very low-technology sector. This confirms the findings from R. Margolis and D. Kammen, among others, which used data from the United States.27 Figure 1 also illustrates a declining and significant trend. R&D intensity for the year 2006 witnessed a slight increase for some companies, but the trend remains negative. R&D intensity is 0.249 percent on average for the 2006 year (for which data are available for all firms). The R&D intensity for the year 2000 was 0.631 percent on average.28 The decline is highly significant and corresponds to a period where liberalization actually occurs for a number of countries in our panel (the 13 nationpanel includes Austria, Denmark, Finland, France, Germany, Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom). Of course, it may be argued that strict openness of markets occurred at different moments in each country, but since companies are aware of the global process, we can consider that they expect liberalization to occur and, therefore, can act accordingly. For some firms, our time span corresponds to a liberalization period and for others it corresponds to the preparation prior to this process (cf. J. Percebois).29 For a number of companies, such as Scottish and Southern, Scottish Power, Enel, and Eon, R&D budgets indicate negligible innovation activity.30 For others, including Electricit e de France, British Energy, and Vattenfall, R&D budgets have been maintained at the same level in nominal terms despite a sharp increase in turnovers. For all other firms, budgets have declined dramatically whereas turnovers generally have increased in response to the liberalization. The dramatic decline in R&D expenditures can be explained by a quasicomplete externalization of the R&D activity either in newly created companies or elsewhere. This is the case for Enel whose R&D department has been delocalized toward the Centro Elettrotecnico Sperimentale Italiano Giacinto Motta SpA (known as CESI). Enel directly or less directly holds about 40 percent of CESI’s capital. CESI is responsible for almost all system research for Italy, even though Enel kept Conphoebus, a subsidiary solely attempting to develop innovations in

Figure 1

ENERGY INTENSITY FOR MAJOR EUROPEAN UTILITIES, 1995–2007 (research and development/sales as a percentage)

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Source: Compiled from annual reports of firms by the authors.

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the renewable energy sector (with a limited budget of 4.22 million euros).31 The situation is similar for Eon, which in 2002 abandoned its subsidiary Degussa in order to free up cash to acquire Ruhrgas (Germany) and Powergen (United Kingdom). The case of Electricit e de France (EDF) is a good example of what F. Munari posited for newly privatized firms.32 The R&D budget for EDF was 439 million euros in 1991; yet, in 2007 it was only 375 million euros. Meanwhile, the turnover of the firm has jumped from about 10 billion to about 60 billion euros. The large decrease in nuclear energy research partially can be explained by the drop in energy intensity. Nevertheless, liberalization appears to be the best factor to explain the extent to which the firm withdrew from R&D.33 It also should be noted that the single largest portion of EDF’s R&D budget is directed toward nuclear waste treatment solutions (32.1 percent of the 2002 budget) and not to the development of new technologies (only 2.6 percent for the same year). Thus, strong contraction of R&D activity seems to be the rule rather than the exception today. Several motivations for the change in internal innovation policies can be provided: (1) encouraging some growth through merger and acquisitions to become large enough as not to be attractive ‘‘prey’’ for competitors (‘‘eat-not-tobe-eaten’’ approach), see C. Kemfert;34 in this framework, saving R&D costs allows for an increasing of the financial power of the firm; (2) increasing the competitiveness of the firm in a more and more competitive framework; this may permit the enterprise to establish or improve its market share (cf. F. Munari);35 (3) improving the firm’s accounting data to provide investors with a better signal, thereby leading to a reduction in the cost of capital; (4) limiting costs of investing in public goods (R&D) while benefiting from investments by competitors; note that the generation of knowledge provides positive externalities and, as such, is produced in lower than optimal quantities in a purely competitive framework;36 and (5) outcomes from innovative activity are uncertain by nature and still more uncertain in a competitive framework (see P. Geroski).37 Moreover, in addition to the uncertainty coming from competitors’ actions, regulatory uncertainty may be a significant cause of the postponement of investments. According to T. Jamasb and M. Pollitt, this downturn in R&D spending by companies may have been expected from an analysis of both industrial organization literature and features of the energy network industries.38 As suggested in the introduction, it also could have been anticipated from the relationship between competition intensity and the level of innovation.39 An alternative, but complementary, explanation in EURELECTRIC’s report is that top-level management considers R&D as unessential for the normal functioning of the company and an unclear relationship exists between profits and innovation, at least in the short or midterm.40 Managers may prefer lowering the cost of capital rather than developing uncertain and non-immediately profitable technologies. This last point leads to a paradoxical idea, namely, that R&D cost savings are exhibited rather

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than hidden. In all annual reports from our panel of firms, R&D efforts proudly are announced to be focused exclusively on applied R&D or commercial R&D. A representative example is provided in the 2003 Laborelec’s report.41 Another concern may be that the observed decrease in R&D budgets takes place over a period when environmental regulation is becoming increasingly more stringent. However, this should have a positive effect on R&D, thus rendering the decrease in R&D budgets still more significant. Reducing Private R&D Budgets as a First Manifestation of the Rationing of Firms’ Innovation Activity: Figures provided on the R&D expenditures by the major energy enterprises seem to confirm at the European level the first trait of the R&D restructuring originally highlighted in J. Dooley regarding energy-sector liberalization.42 Increased competition coming from the deregulation process, which occurred in Europe over the past years, in all likelihood has led energy firms to cut their R&D budgets in order to increase their competitiveness and to gain in efficiency. We find that a similar phenomenon occurred in privatization processes (cf. F. Munari and F. Munari et al. for some examples of privatizations and an analysis of their R&D restructuring).43 Indeed, in a low-technology-intensive sector such as energy, deregulation is likely to reduce knowledge production by firms and induce them into competition a ` la Bertrand in order to strengthen or even 44 increase their market share. In such a framework, liberalization appears favorable in the short term for consumers because of the emergence of more ‘‘customeroriented’’ products and better segmented markets. This is the case, for instance, of the so-called ‘‘super-utilities,’’ which provide a large set of services ranging from water supply to multi-energy supply and to waste management for their customers. RWE and Eon are representative examples of these kinds of utilities. From the supply side, the cut in the R&D budget (i.e., the ‘‘scale’’ of R&D) appears related to the rationing of private R&D. As in F. Munari’s work, our figure 2 illustrates the consequences of the reduction in R&D investment by energy firms, but distinguishes between short and longer term.45 First, when the rationing of private R&D is a synonym of a diminution of waste in financial resources and the abandonment of non-beneficial projects, then the budgetary reduction has a positive effect both from the private and social point of view and in the short, medium, and long term (see J. Dooley, F Munari, and F. Munari et al.).46 This is represented in figure 2 by effects 1 to 4. The benefit comes from a better resource allocation and the subsequent increase in productivity of each euro spent for R&D. Second, when the reduction in R&D budgets comes from an externalization of R&D activities, which are far from the core business, and when these activities are likely to be better realized by specialized firms, then the abandonment of such activities has a positive effect for the company in the short term (effect 5). Indeed, this leads to a cognitive organization of the industry (in the sense of G. Dosi et al.), which is more coherent.47 Nevertheless, as pointed out by F. Munari regarding

Figure 2

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POTENTIAL CONSEQUENCES OF ENERGY-SECTOR DEREGULATION ON RESEARCH AND DEVELOPMENT (R&D) EXPENDITURES BY FIRMS AND THEN ON PRIVATE AND SOCIAL RETURNS

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privatizations in network industries, a crucial issue remains to understand whether the drop in R&D budgets essentially is related to the logic described above (eliminating inefficiencies) or whether it is a more profound policy leading to a significant contraction of the set of projects thus favoring more business-oriented projects and a shorter-time horizon.48 If this second assumption is true then consequences could be potentially negative in the short term for the society (effect 7) and in the longer term for both the firm and society (effects 6 and 8). These last effects illustrate the lowered probability for the company to transition from one technological path to another. The next section will highlight the second trait of the R&D restructuring in the energy sector, namely, the increase in the number of granted patents first noted by J. Dooley is not established in the European case.49 Decrease in the Number of Energy-Related Patents: While R&D budgets are considered as one of the main inputs in the innovation process for the firm, granted patents generally are examined to investigate the output of innovation. There is a long-standing debate in the literature, beginning with B. Hall et al. and Z. Griliches, concerning the relevancy of this approach.50 However, as argued in R. Margolis and D. Kammen, ‘‘patent records [ . . . ] provide a consistent metric over time and a sufficiently large data set for comparative quantitative analysis across economic and industrial sectors.’’51 Global Increase in Energy Patents and Specific Decrease for Energy Firms at the U.S. Patent and Trade Office: In this section, we are interested in the innovation process output from energy firms whose R&D budgets were examined in the previous section. In order to consider patents in the energy field, we operate a keyword search on patents abstracts in the U.S. Patent and Trade Office (USPTO) patent database.52 At this point, two differences with R. Margolis and D. Kammen have to be pointed out.53 First, we conducted our research on patent abstracts rather than on the patent titles because further investigation showed that too many patents were rejected with the latter. A patent entitled ‘‘gas compressor,’’ for instance, would not pass the filter unless defining the search too broadly. Second, the keywords are chosen more largely to include some new technology and fields of research.54 The study in R. Kammen and D. Margolis did not include fuel cells, efficiency, or pipelines, for example. Our basic research looks at energy technology patents for European countries considered in the next section. For these countries, the number of patents granted each year is represented in figure 3 (solid black line). Our refined search considers, among patents in basic research, those that can be attributed to firms in panel A (dotted black line).55 This procedure allows us to compute the ratio of the number of patents granted, which can be attributed to the firms in panel A, to the number of patents for European nations (see table 1).

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THE JOURNAL OF ENERGY AND DEVELOPMENT Figure 3
ENERGY TECHNOLOGY NUMBER OF PATENTS GRANTED BY THE UNITED STATES PATENT AND TRADEMARK OFFICE FOR a EUROPEAN COUNTRIES AND FIRMS, 1990–2007

The 13 countries in our study are: Austria, Denmark, Finland, France, Germany, Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom. The 14 firms constituting panel A include: Suez (France), Electricit e de France (France), Gaz de France (France), EnBw (Germany), Eon (Germany), RWE (Germany), Enel (Italy), Scottish Power (United Kingdom), British Energy (United Kingdom), Scottish and Southern (United Kingdom), Union Fenosa (Spain), Iberdrola (Spain), Endesa (Spain), and Vattenfall (Sweden). Source: Data compiled by authors from the United States Patent and Trademark Office, 2008.

a

Our first observation is similar to the one presented in R. Margolis and D. Kammen, namely, that R&D investments and patents are correlated.56 The broad decline in R&D budgets for our panel of companies is accompanied by a significant decrease in the number of patents. At the beginning of the 1990s, the number of patents granted for our firms was about 30. Over the four-year period from 2004 to 2007, for the same group of companies far fewer patents (5 to 10) have been granted. Another finding is the increasing pattern in the total number of energy patents granted at the USPTO for European countries. This is in sharp contrast with observations from R. Margolis and D. Kammen, who found a dramatic decline for the period 1976–1996.57 Of course, our reference period is very different, but the

EUROPEAN ENERGY R&D AND DEREGULATION Table 1
ENERGY INTENSITY AND WEIGHTED BY SALES AVERAGE, 2000 AND 2006 Company Suez Electricit e de France Gaz de France EnBw Eon RWE Enel Scottish Power British Energy Scottish and Southern Union Fenosa Iberdrola Endesa Vattenfall Average of R&D intensities weighted by sales: 2000 1.02% 1.35% 0.82% 0.17% 0.52% 0.86% 0.49% 0.13% 0.92% 0.04% 2.11% 0.00% n.a. 1.81% 0.631% 2006

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0.19% 0.66% 0.30% 0.16% 0.04% 0.17% 0.06% 0.01% 0.43% 0.05% 0.27% 0.51% 0.20% 0.56% 0.249%

Source: Compiled from annual reports of firms by the authors.

trend is indeed increasing. Our major finding is that despite a growing number of energy patents for Europe as a whole, innovation output by energy companies has dropped dramatically. Table 2 provides an additional feature of the process where we observe that the part of innovative activities in the energy field due to panel A firms has been reduced from 30 percent in 1990 to 3 percent in 2007.58 Our strategy avoids enumerating energy equipment manufacturers as in the work by V. Jacquier-Roux and B. Bourgeois; this is advantageous as it is always difficult to perfectly identify these actors.59 We then can conclude that despite the fact that F. Munari and M. Sobrero find an increase in R&D productivity for a panel of 35 companies after privatization, this is not the case for our panel, and as such for energy industry restructuring in Europe.60 Indeed, the fact that the number of patents granted is declining unambiguously indicates a decrease in innovation activity. The Decrease of the Number of Granted Energy Patents by Energy Firms: The Second Manifestation of Rationing of Innovative Activity: Beyond the fact that the liberalization of energy network industries implied a clear cut in private R&D budgets, it also seems to be an incentive for modifying the scope of R&D, i.e., their portfolio of innovating projects. In combination with shareholder pressure, competitive forces lead companies to seek R&D short-term returns instead of longer-term benefits, e.g., fundamental research.61 In this framework, medium- and longer-term

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PERCENTAGE OF ENERGY TECHNOLOGY PATENTS GRANTED BY THE UNITED STATES PATENT AND TRADEMARK OFFICE ATTRIBUTED TO FIRMS IN PANEL A, 1990–2007

Year 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Percentage 31.63% 37.04% 16.49% 22.83% 20.51% 30.11% 22.86% 29.29% 28.46% 14.29% 14.29% 14.74% 11.50% 6.11% 2.22% 6.15% 2.74% 3.11%

Source: Data compiled by authors from the United States Patent and Trademark Office, 2008.

projects are left aside in favor of applied R&D, which is perceived as less risky (cf. J. Dooley) and is likely to be beneficial in the short term if patents are granted for these projects.62 In the U.S. case, J. Dooley also finds an increase in the number of patents granted following the deregulation of the energy sector. N. Johnstone et al., using a panel of companies in 25 countries, study the response of innovation to environmental policy.63 For quantity-based policies (e.g., mandates), R&D is directed toward the most competitive technologies (wind) that are most likely to compete with existing technologies. When environmental policy relies on price-based instruments such as feed-in tariffs or tax credits, then research is oriented toward innovative technologies that are still far from being profitable. But their study does not consider the impact of energy industry restructuring on the company’s knowledge output. In addition, while technological change in the energy industry used to be related to the innovation process during the last decades (J.-M. Martin), deregulation is an incentive to invest in more ‘‘product-oriented’’ R&D projects in order to establish customer bases and increase market share (cf. J. Dooley and F. Munari et al.).64 Moreover, looking for R&D short-term profitability leads firms to limit ‘‘in-

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house’’ R&D, which is likely to be better adapted to the firm’s needs. Companies then rely on external R&D for complementary R&D that has been left aside. At the European level, the trend in the number of granted patents is in no way comparable with that of the United States.65 The positive effect of the number of patents granted, which is described in a number of papers (for instance, R. Margolis and D. Kammen) and should be fostered due to deregulation, is not establishing itself in Europe.66 In the European case, a negative effect on the number of granted patents seems to dominate and, as such, the decrease in private R&D budgets is so intense that the output of R&D in the form of granted patent also has decreased. Thus, in the short term, the consequences from the second feature of private R&D rationing on the profitability appear mixed (effect 9 of figure 2). On the one hand, investment in ‘‘products-oriented’’ R&D projects is more profitable in the short term for firms but favoring ‘‘in-house’’ R&D is likely to duplicate existing research.67 On the other hand, the decrease in the number of granted patents gives some support to the assumption that companies may not be able to benefit from resulting innovations because of the reduced scope of R&D. Thus, we will consider the short-term consequences on private profitability as ambiguous and those on social welfare as potentially negative (see figure 2, effects 9 and 11, respectively).68 In the long term, the reduction of longer-term projects is likely to have adverse consequences for both private and social profitability (figure 2, effects 10 and 12). Potential Dynamic Consequences of Energy R&D Rationing: Exploitation vs. Exploration? Even by considering R&D restructuring as a transitory process, allowing companies to better establish their market shares, a lag in R&D activity may have some detrimental dynamic implications in the long term. In particular, restricting R&D could limit firms’ capacities to escape from a ‘‘lock-in’’ situation in a given technological path. Following J. March’s research, we see that knowledge accumulation can be achieved through two strategies: exploitation or exploration.69 The dilemma ‘‘exploitation vs. exploration’’ within the enterprise can be spelled out as follows: the company’s short-term survivorship requires an efficient exploitation of existing resources and knowledge, whereas long-term survivorship calls for exploring for new technological opportunities and developing new technological competencies. J. March points out that improving the company’s production technology (its knowledge stock and technological capacities) is related to the exploitation process. Learning is a way to reach these technological improvements through incremental innovations within an enterprise’s technological trajectory. 70 When pursuing exploration strategies, it appears that radical innovations can emerge from the originality of new knowledge exceeding the learning process, thus referring to paradigmatic ruptures.71 When a radical innovation appears, the

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new technological paradigm derived from this innovation then represents the new knowledge foundations for the company.72 By seeking to remove inefficiencies and stimulate short-term profitability from R&D investment, the rationing of R&D falls consequently within the scope of exploitation strategies. Therefore, the change in R&D portfolios toward more short-term projects confirms the abandonment of exploration strategies. In particular, the restructuring of private R&D—which has been observed post-liberalization in the European energy sector—appears in opposition to two main features of the first phase of the paradigmatic rupture, during which new technical principles arise and are selected: first, the necessary non-risk aversion of firms, and, second, the diversity of technological solutions that are likely to be selected. 73 Additionally, it must be noted that the emergence of a new technological paradigm within the company can take a long time to develop (as shown in J. Metcalf and M. Boden), which is hardly compatible with the decrease in the time horizon in R&D projects funded by today’s companies.74 Finally, by leaving aside exploration strategies and, as such, new knowledge emergence, R&D restructuring is likely to reduce private benefits and then social benefits from long-term R&D (effects 6, 8, 10, and 12, figure 2). Of course, private and public R&D budgets cannot be considered as the only source of innovative advancement. Financial support also is needed to facilitate the spread of innovation, thereby reinforcing ‘‘learning by doing.’’75 Even if technological paradigms are a source of potential exploration for companies, the technological path of the firm strongly condition these paths of exploration.76 Therefore, the ability of companies to develop new paradigms— when decreased—should limit their capacity to detect and then explore for new opportunities. A lower diversification of R&D portfolios due to a refocusing toward core-business activities for the company should reinforce the phenomenon by reducing the ‘‘cognitive area’’ of technological opportunities that are likely to be detected by the enterprise (F. Munari).77 Indeed, even if technological knowledge never dies (cf. J. Martin), frequently it has to be used to remain profitable at a sufficiently high performance level.78 The same is true for fundamental abilities of the firms, where the lack of practicing and engaging may be a source of forgetting.79 To conclude, we can state that the restructuring of energy R&D may deter resource creation and, as such, increase the ‘‘lock-in’’ phenomena, despite the fact that a general redefinition of the R&D goal may allow for economies of scale. After having studied private R&D restructuring, it appears relevant to question whether public R&D could compensate in some ways for the observed decrease in the private-sector’s contribution. The Decrease in Public Energy R&D Budgets and Innovation Policy The importance of public funding for energy R&D is discussed in D. Popp, where the author examines citations to public-funded patents vs. private-funded

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patents over 11 technology categories.80 It is shown that patents that are more frequently cited are publicly funded, thereby indicating that public funds are used for more basic research.81 Another feature of public funding is developed in D. Guellec and B. van Pottelsberghe de la Potterie, who show that public funding has a statistically significant impact on private R&D but that this impact depends on the stability of the government’s effort.82 The U.S. example seems to suggest that publicly funded R&D cannot replace qualitatively industry-led R&D, but R. Bell and T. Schneider argue for a federal legislation able to compensate for decreases in private R&D.83 As noted in the introduction, a competitive structure for the energy industry does not deliver sufficient incentives for the development of new technologies, mainly because environmental benefits generally are viewed as purely public goods. To overcome this deterrence phenomenon—which is well known in public economics—increased government support is needed. In view of the figures provided in the previous section about private levels of energy R&D investment, which have dramatically declined, public R&D is even more necessary. Unfortunately, the analysis of the evolution of public R&D budgets in European countries shows a large decrease over the 1985–2006 period. This is true in terms of both volume and percentage. A Generalized Decrease of Public Energy R&D Budgets in Europe: For many of the countries in the IEA portfolio, public energy R&D budgets have decreased significantly from 1985 to 1997 and, since 2001, are now slowly rising again (figure 4). To illustrate this, note that the total energy R&D budgets for our panel of 13 European countries reached a peak of U.S. $11.4 billion in 1985; they totaled U.S. $6.7 billion in 1997 (a decrease of one-third) and in 2006 reached U.S. $8 billion. The main R&D contributors are the United States, Japan, and, to a lesser extent, the United Kingdom. Over the 1985–1997 period, public budgets essentially have decreased in ‘‘fossil fuels’’ (–25.1 percent), mostly for coal, and in ‘‘nuclear energy’’ (–56.7 percent), mostly for ‘‘fission.’’ Conversely, they have increased significantly in ‘‘energy efficiency’’ (+26.2 percent), mostly for the ‘‘industry,’’ in ‘‘other power and storage technics.’’ (+46.4 percent), and in ‘‘total other tech./research’’ (+74.8 percent).84 For renewable energies, after a large decrease of more than 32 percent from 1985 to 1989, public R&D now is increasing at an average rate of 2.8 percent per year, but with significant variations. Nevertheless, the increase in the R&D budgets for renewable energies has no common measure with the decrease in nuclear energy and fossil fuels. As a consequence, public energy R&D budgets now are well below their mid-1980s levels. Even with a progression in growth of about 3 percent per year, public budgets only will reach their 1985 levels in real terms around 2018.

Figure 4
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ENERGY RESEARCH AND DEVELOPMENT (R&D) PUBLIC BUDGETS FOR OUR PANEL OF 13 COUNTRIES (in billions of euros)

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The 13 countries are: Austria, Denmark, Finland, France, Germany, Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom. Source: Compiled by authors with data from the International Energy Agency (IEA), Energy Statistics of OECD Countries (Paris: IEA, 2009).

a

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Beyond raw figures, it is of interest to consider the energy R&D intensity for countries in our panel (see table 3). R&D intensity provides a measure of the real effort by countries to support R&D. Over the 1985 to 2006 period, the energy R&D intensity has been divided by a factor of about 2 (or –43%). In 1985, energy R&D budgets represented on average 0.63 percent of the gross domestic product (GDP) of our panel; in 2006, it was only 0.35 percent. Only one country succeeded in increasing its energy R&D effort (Denmark) and only one other in stabilizing the intensity (Norway). All other nations in our study have seen their energy R&D intensity drop dramatically, as can be observed in the last column of table 3. At the European level, the decrease in energy R&D budgets is still more dramatic. Figure 5 provides a striking illustration of the trend of European R&D budgets as a percentage of GDP for our 13 selected case countries. Cumulative public budgets for energy R&D were around U.S. $1.8 billion in 2001 vs. U.S. $5.1 in 1985, which corresponds to a decrease of 64.8 percent. After 2002, public budgets were again above U.S. $2 billion with an annual trend until 2006 of 5.7 percent. As for private-sector budgets, such a trend would have to continue through the year 2019 to achieve a recovering level equal to that of year 1985. For European countries, as for IEA countries, ‘‘fossil fuels’’ (–26.9 percent) and ‘‘nuclear energy’’ (–76.5 percent, essentially ‘‘fission’’) witnessed the most significant decreases. However, European countries also have cut their ‘‘energy efficiency’’ budgets by 24.4 percent. Public budgets dedicated to ‘‘renewable Table 3
ENERGY RESEARCH AND DEVELOPMENT (R&D) SHARE IN GROSS DOMESTIC PRODUCT (GDP), 1985 AND 2006 Country Portugal United Kingdom Italy Spain Netherlands Sweden Germany Canada Austria United States France Switzerland Japan Finland Norway Denmark 1985 0.2090 0.8077 1.2492 0.2246 0.8288 0.7615 0.5642 1.0150 0.3182 0.5609 0.8242 0.4918 1.1488 0.5667 0.3393 0.1087 2006 0.0122 0.0556 0.2735 0.0546 0.2429 0.2437 0.1844 0.3707 0.1311 0.2418 0.4486 0.3483 0.8245 0.4730 0.3279 0.3686 Change –94.16% –93.11% –78.11% –75.67% –70.69% –68.00% –67.32% –63.48% –58.81% –56.89% –45.57% –29.17% –28.23% –16.54% –3.36% 239.24%

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energies’’ R&D follow a similar trend compared to other IEA countries. In summary, for European countries—as for IEA countries as a whole—the trend in energy R&D budgets show a radical change in national priorities. In addition, the slight increase in some specific energy R&D segments does not compensate for the dramatic decline between 1985 and 2006. The national public effort for European countries mirrors the other IEA country cases, as is displayed in figure 6. From 1985 to 2006, the share of GDP dedicated to energy R&D saw an average decrease of 44.9 percent. In 1985, energy R&D intensity was on average 0.56 percent vs. 0.31 percent in 2006. Denmark witnessed the opposite trend; its R&D efforts during the same time period increased from 0.11 percent to 0.37 percent. The decrease in public energy R&D, which was first highlighted in J. Dooley for the period 1985–1995, thus has been accentuated during the subsequent years.85 This is true at the worldwide level and at a European level as well—both in terms of volume and intensity. Facing a concomitant decrease from both the private- and public-sector R&D arenas, we wonder which public policies potentially may reverse the observed trend. In the next section, we present some policy measures that could influence the innovative behavior of firms in the energy sector. In response to declining R&D budgets in the private and public domains, these kinds of policies appear essential.

Encouraging Energy R&D Investment If, as it appears, R&D policies are now more business-oriented and focusing on shorter-term objectives, then it seems appropriate to use stronger incentives to improve the level and the quality of investment in energy R&D. In this section, we do not contend to offer an exhaustive list of policy measures dedicated to encourage energy R&D but, rather, provide some illustrations of these kinds of policies. Two types of policy measures are worth highlighting—note that these are not exclusive—and can be used to break the trend. These are first measures of policies dedicated to regulate the energy sector itself and second policies aiming at establishing partnerships between the public and the private spheres. The Tax: A Regulatory Measure: Tax systems still exist in Denmark and Italy, but also in the United States, where the process is, as we will see, particularly interesting. In Denmark, the R&D concerning the transport of electricity is financed through a tax on sales, collected by the Public Service Obligation (PSO).86 The budget is managed by transportation companies Eltra and Elkraft System, which decide about the redistribution scheme for research organisms both public and private (Risø National Laboratory, technical institutes, universities, and

Figure 5

SHARE OF ENERGY RESEARCH AND DEVELOPMENT (R&D) BUDGETS AS A PERCENTAGE OF GROSS DOMESTIC PRODUCT (GDP) IN SELECTED EUROPEAN COUNTRIES, 1995–2006 (in percent)

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Source: Compiled by authors with data from the International Energy Agency (IEA), Energy Statistics of OECD Countries (Paris: IEA, 2009).

Figure 6

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SHARE OF ENERGY RESEARCH AND DEVELOPMENT (R&D) BUDGETS AS A PERCENTAGE OF GROSS DOMESTIC PRODUCT (GDP) BY REGION, 1985–2006 (in percent)

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Source: Compiled by authors with data from the International Energy Agency (IEA), Energy Statistics of OECD Countries (Paris: IEA, 2009).

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private companies). Research priorities are determined by the Danish Energy Agency in accordance with a scientific council (Advisory Council of Energy Research), which itself includes different committees. PSO succeeded in increasing significantly R&D investments in the energy sector; thus reaching a level that is more likely to satisfy the country’s ambition to remove coal as a source of energy.87 As noted in EURELECTRIC, the obligation given to transmission system operators to finance innovation in environmental-related technologies has contributed to preserving a sufficient level of R&D investment, even after liberalization.88 In a similar manner, Italy aimed at modifying its energy R&D expenditures by using a tax on electricity consumption.89 This tax is managed by the National Agency for New Technologies, Energy and the Environment (ENEA)—one of this agency’s main priorities is to develop new technologies with the goal of replacing more polluting ones.90 The major share of the budget goes to the CESI (see section on ‘‘Liberalization and the Innovative Activity of European Energy Firms’’), whose name was Enel R&D and whose research now benefits the whole set of participants in the Italian energy industry. This kind of administered and centralized R&D—despite appearing at first in total opposition to the liberal policy that led to deregulation in the first place—is justified in view of the sustainable development issues with which the world is faced. Another motivation for this centralized system may be the non-Schumpeterian feature of the energy sector, which probably has reduced R&D budgets.91 The research program in CESI is universal in scope (for the entire country). This also is true of the Electric Power Research Institute (EPRI) in the United States (discussed in the following paragraph). The debate about feasibility and necessity to organize a federal research program in a competitive framework is discussed at length in S. Thomas for the liberalized gas sector in the United States.92 In the United States, the EPRI set forth a 0.25-percent objective for each utility’s R&D budget when reported to the turnover. The main aim of this measure is again to reverse the significant decline in U.S. energy R&D budgets by companies first noticed in J. Dooley and R. Margolis and D. Kammen.93 The main goal of this kind of innovation policy is to leave the orientation for research open, which consequently could permit companies to produce knowledge in the most beneficial sector from the firm’s point of view. This is a well-known feature of fiscal advantages which, in opposition to any centralized research program, does not constrain the set of projects for the firm. In other words, this 0.25-percent threshold provides the firm the freedom to make the most of its own competencies while guaranteeing a given level of R&D at the national level. However, decentralized management of a ‘‘national’’ energy R&D raises the issue of both economic agents’ motivation and the form of tax to implement. For instance, the tax can be more or less linear and can be raised on a consumption or a profit basis. Another tax tool is represented by the feed-in tariffs that are in use in many European countries. The aim is to guarantee to energy producers—sometimes

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individuals—that are using renewable sources a minimum price for the electricity they generate. This kind of policy seems to have interesting results in light of the findings in N. Johnstone et al., where the number of patents is increased in the fields where prices are guaranteed.94 Public/Private R&D Cooperation: C. Defeuilley and A. Furtado note that the main model that should exist to encourage R&D investment within the energy sector is an associative form, merging both public and private funds.95 It is worth mentioning that this institutional form is rational because private and social interests are combined for the energy sector where R&D output, in particular, can be assimilated for the public good.96 D. Popp et al. argue that government/industry partnership may encourage the ‘‘transfer’’ from basic to applied research and, as such, improve the commercialization of novel technologies.97 This is an important role for public funding in conjunction with the private one. In addition to the global volume of R&D, partnerships between public and private entities are a way to improve the global efficiency of energy R&D. A good example of such a partnership can be found in Finland where energy R&D is organized through a number of programs bringing together the major players in the energy industry (politics, companies, research institutes, and universities). The private sector provides more than 50 percent of the funding, but the research output is immediately beneficial to the public at large. The rule is that any innovation deriving from a program where public funding exists—even at a moderate funding level—is a public innovation. Thus, Finland is able to support a large federal program by overcoming the common obstacles related to the long-term horizon and the uncertainty inherent to any research activity. Sweden’s approach to R&D organization is similar. A common institution, Elforsk, is in charge of R&D for Vattenfall, Sydkraft, and Birka, the nation’s three main utilities. Likewise, Spain has tested such a public-private partnership by implementing research committees (OCIs) during the 1990s. Each committee (one for each energy source) was managed by an equal number of public and private members, but the final decision comes from the public side, which definitely remains the fund-raising entity. Research is then directed by the national entities: CIEMAT for energy efficiency and cogeneration and IDAE for renewable energy. A similar position has been adopted in Switzerland, whose short-term objectives are qualitatively described (increasing energy efficiency and development of new technologies) while long-term objectives are quantified. Again, cooperation between the private and public sectors is strong. The private sector funds about 80 percent of the final budget. Research priorities are debated between public and private members but again, as in the case for Spain, the final decision maker is from the public sector. Consequently, mixing private and public entities in order to develop a suitable research program works in a number of European countries. This seems to be an

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efficient way to make research coherent at a lower cost but with a targeted volume that can be fixed in advance. Such programs are able to answer the demand by firms for business-oriented innovations while not ignoring more fundamental research, which is not of immediate benefit to companies. As mentioned above, it is this part of R&D that is primarily abandoned by firms in a competitive environment and, therefore, requires more effort from the public sector. Public-private partnerships also allow for a restriction of the interventionist aspect of pure public research, while enhancing the social return of innovations.

Conclusion This article shows the dramatic decline in energy R&D both from private and public entities in Europe. The innovative activities from energy firms have witnessed significant reductions in response to liberalization. A striking fact is that the decline in private energy R&D budgets has not been compensated for fully by public expenditures in this field. As suggested in C. Defeuilley and A. Furtado, such a decline leads to a divergence between the social optimum and the present situation where innovation is kept at a minimum level and directed toward commercial needs only.98 Another conclusion is that output from R&D activity, measured by granted patents from major firms, has declined substantially in Europe while the number of granted patents for the energy sector as a whole has significantly increased. This emphasizes a severe disengagement by major utilities whose research is now directed toward ‘‘products-oriented’’ activities. It could be argued that a lower level of R&D activity in the European energy sector may be caused by excessive research intensity in the period before liberalization. But it is doubtful that the point to which R&D has declined to during recent years was in the public’s interest. Indeed, the issues we developed in this article’s introduction, such as the environment, long-term competitiveness, and better accessibility to energy for poorer nations, should speak in favor of a significant increase in energy activity. Our main contribution in this paper was to show that this was not the case in Europe. Further research may include a deeper analysis of R&D budgets for firms in the heavy electrical equipment industry, as considered in the work by V. JacquierRoux and B. Bourgeois but not detailed in it.99 This would permit a better understanding of the impact of the liberalization process on innovative activities by firms closely related to the energy industry. Another research theme would be a decomposition of R&D inside the firm in order to understand the new repartition developed in response to deregulation. Is R&D mainly dedicated to marketing or operational activities? How is R&D now managed with regard to competition? Of course, R&D decomposition becomes a very strategic variable in times of competition; thus, it becomes harder to gather information on this cogent subject.

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NOTES

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1 J. J. Dooley, ‘‘Unintended Consequences: Energy R&D in a Deregulated Energy Market,’’ Energy Policy, vol. 26, no. 7 (1998), pp. 547–55; R. M. Margolis and D. M. Kammen, ‘‘Evidence of Under-Investment in Energy R&D in the United States and the Impact of Federal Policy,’’ Energy Policy, vol. 27, no. 10 (1999), pp. 575–84; C. Defeuilley and A. T. Furtado, ‘‘Impacts de l’ouverture a ` la concurrence sur la R&D dans le secteur  electrique,’’ Annals of Public and Cooperative Economics, vol. 71, no. 1 (2000), pp. 5–28; V. Jacquier-Roux and B. Bourgeois, ‘‘New Networks of Technological Creation in Energy Industries: Reassessment of the Roles of Equipment Suppliers and Operators,’’ Technology Analysis & Strategic Management, vol. 14, no. 4 (2002), pp. 399–417; G. F. Nemet and D. M. Kammen, ‘‘U.S. Energy R&D: Declining Investment, Increasing Need, and the Feasibility of Expansion,’’ Energy Policy, vol. 35, no. 1 (2007), pp. 746–55; and T. Jamasb, W. J. Nuttall, and M. Pollitt, ‘‘The Case for a New Energy Research, Development and Promotion Policy for the UK,’’ Energy Policy, vol. 36, no. 12 (2008), pp. 4610–614. 2 A. D. Sagar and J. P. Holdren, ‘‘Assessing the Global Energy Innovation System: Some Key Issues,’’ Energy Policy, vol. 30, no. 6 (2002), pp. 465–69.

T. Jamasb and M. Pollitt, ‘‘Liberalisation and R&D in Network Industries: The Case of the Electricity Industry,’’ Research Policy, vol. 37, nos. 6–7 (2008), pp. 995–1008. N. L. Rose and P. L. Joskow, ‘‘The Diffusion of New Technologies: Evidence from the Electric Utility Industry,’’ RAND Journal of Economics, vol. 21 (1990), p. 354.
5 D. Popp, R. G. Newell, and A. B. Jaffe, ‘‘Energy, the Environment, and Technological Change,’’ NBER Working Paper no. 14832, Cambridge, Massachusetts, National Bureau of Economic Research (NBER), April 2009. 6 7 4

3

Ibid., p. 1.

P. Aghion, N. Bloom, R. Blundell, R. Griffith, and P. Howitt, ‘‘Competition and Innovation: An Inverted-U Relationship,’’ Quarterly Journal of Economics, vol. 120, no. 2 (2005), pp. 701– 28, and P. Sanyal and L. R. Cohen, ‘‘Powering Progress: Restructuring, Competition and R&D in the US Electric Utility Industry,’’ Energy Journal, vol. 30, no. 2 (2009), pp. 41–80, examine the U.S. case.
8 9

R. M. Margolis and D. M. Kammen, op. cit.

C. Blumstein and S. Wiel, ‘‘Public-Interest Research and Development in the Electric and Gas Utility Industries,’’ Utilities Policy, vol. 7, no. 4 (1998), p. 191.
10

T. Jamasb and M. Pollitt, op. cit.

11 A. Sterlacchini, ‘‘Minding the R&D Drop of European Utilities: Relevance, Explanations, Remedies,’’ paper presented at the International Conference on ‘‘Innovation and Competition in the New Economy,’’ Milan, Italy, May 4–5, 2007, available at http://www.intertic.org/Conference/ Sterlacchini.pdf, and T. Jamasb and M. Pollitt, op. cit.

J. J. Dooley, op. cit.; for a recent discussion on this issue also see G. F. Nemet and D. M. Kammen, op cit.

12

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13

183

A. Sterlacchini, op. cit.

14 E. Mansfield and L. Switzer, ‘‘Effects of Federal Support on Company-Financed R&D: The Case of Energy,’’ Journal of Management Science, vol. 30 (1984), pp. 562–71.

P. A. David, B. H. Hall, and A. A. Toole, ‘‘Is Public R&D a Complement or Substitute for Private R&D? A Review of the Econometric Evidence,’’ Research Policy, vol. 29, no. 4 (2000), pp. 497–529. The main consequence of the largeness of the energy system is their internal resistance to innovations when confronted with these innovations. J. Markard and B. Truffer, ‘‘Innovation Processes in Large Technical Systems: Market Liberalization as a Driver for Radical Change?’’ Research Policy, vol. 35, no. 5 (2006), pp. 609–25.
17 18 16

15

D. Popp et al., op. cit., p. 21.

L. M. Branscomb and P. E. Auerswald, ‘‘Between Invention and Innovation: An Analysis of the Funding for the Early-Stage Technology Development,’’ NIST GCR paper 02-0841, Advanced Technology Program, Economic Assessment Office Document, National Institute of Standards and Technology (NIST), Gaithersburg, Maryland, 2002.
19 20

C. Defeuilley and A. T. Furtado, op. cit.

P. Sanyal, ‘‘The Effect of Deregulation on Environment Research by Electric Utilities,’’ Journal of Regulatory Economics, vol. 31, no. 3 (2007), pp. 335–53. G. De Martino Jannuzzi, ‘‘Power Sector Reform in Brazil and its Impact on Energy Efficiency and Research and Development Activities,’’ Energy Policy, vol. 33, no. 13 (2005), pp. 1753–762.
22 J. Markard, B. Truffer, and D. M. Imboden, ‘‘The Impacts of Market Liberalization on Innovation Processes in the Electricity Sector,’’ Energy & Environment, vol. 15, no. 2 (2004), pp. 201–14, and V. Jacquier-Roux and B. Bourgeois, op. cit. 23 24 25 21

V. Jacquier-Roux and B. Bourgeois, op. cit. The oil sector also cannot serve as a control group because of its very particular dynamics.

A. D. Sagar and B. van der Zwaan, ‘‘Technological Innovation in the Energy Sector: R&D, Deployment, and Learning-by-Doing,’’ Energy Policy, vol. 34, no. 17 (2006), pp. 2601–608.
26 T. Jamasb and M. Pollitt, op. cit., find that data on R&D spending in the private sector are now ‘‘commercially sensitive.’’ Indeed, such figures do not exist for Europe at an aggregate level as they exist for the United States or Japan. Thus, looking at annual reports appears as the best way to evaluate private R&D investment. 27 28

R. M. Margolis and D. M. Kammen, op. cit. For the year 2006, only data on Endesa are missing.

29 J. Percebois, ‘‘Ouverture a ` la concurrence et r egulation des industries de r eseaux : le cas du gaz et de l’ electricit e,’’ Revue d’Economie Publique, vol. 12, no. 1 (2003), pp. 71–98. At this point,

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two remarks deserve consideration. First, the relatively few number of countries (and firms) considered in the present exercise precludes any empirical exercise in the vein of P. Sanyal, op. cit., because it would lack statistical robustness (more on this has been laid out in the introduction). Second, the same remark applies for any causality investigation in which the results also should be considered with much care.
30 For these firms, R&D intensities for the year 2006 are 0.05 percent, 0.006 percent, 0.04 percent, and 0.05 percent, respectively. 31 32

See the section on ‘‘Encouraging Energy R&D Investment’’ for further developments.

F. Munari, ‘‘The Effects of Privatization on Corporate R&D Units: Evidence from Italy and France,’’ R&D Management, vol. 32, no. 3 (2002), pp. 223–32. It should be noted that EDF has developed in recent years some partnership with the CNRS (creation of the CISEL laboratory for photovoltaic research) and with Karlsruhe University for the creation of the European Institute for Energy Research (EifER).
34 C. Kemfert, ‘‘The European Electricity and Climate Policy–Complement or Substitute?,’’ Environment and Planning C, vol. 25, no. 1 (2007), pp. 115–30. 35 36 33

F. Munari, op. cit.

Note that this is exactly the opposite for pollution, which delivers negative externalities, and is overproduced in a purely competitive framework. P. A. Geroski, ‘‘Models of Technology Diffusion,’’ Research Policy, vol. 29, nos. 4–5 (2000), pp. 603–26.
38 39 37

T. Jamasb and M. Pollitt, op. cit. P. Aghion et al., op. cit.

40 Eurelectric, ‘‘R&D in EURELECTRIC countries, 2002 update,’’ Research and Development Working Group, Ref: 2002-520-0013, Brussels, Union of the Electricity Industry, January 2002.

‘‘En 2003, la lib eralisation du march e a atteint son r egime de croisie ` re [. . . ]. Nous avons observ e l’ evolution des besoins de nos partenaires, et nous sommes r eorganis es en cons equence. [. . . ]. Dor enavant, nous en tiendrons compte lorsqu’il s’agira de choisir nos axes de recherche et de d evelopper de nouveaux services. [. . . ]. Notre souci de maximiser la valeur ajout ee pour nos clients fut l’un des moteurs de notre r eorganisation interne [. . . , ainsi que] d’adapte[r] notre strat egie en cons equence et r eajuste[r] notre portefeuille de projets de recherche [. . . ]. Dans le contexte  economique actuel, la recherche a ` long terme est soumise a ` une pression croissante. Pour l’instant, la plupart des entreprises concentrent leurs efforts sur des projets a ` court terme, dont le rendement doit ^ etre  evident d’embl ee. [. . . ]. Notre ambition prioritaire est d’offrir a ` nos clients la chaı ˆne de  Laborelec (Linkebeek, Belgium: Laborelec valeur la plus comple ` te possible.’’ Rapport d’activite 2003), pp. 2–3.
42 43

41

J. J. Dooley, op. cit.

F. Munari, op. cit., and F. Munari, E. B. Roberts, and M. Sobrero, ‘‘Privatization Processes and the Redefinition of Corporate R&D Boundaries,’’ Research Policy, vol. 31, no. 1 (2002), pp. 31–53.

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44 45

185

R. M. Margolis and D. M. Kammen, op. cit. Figure 1 of F. Munari, op. cit.

46 See J. J. Dooley, op. cit., p. 550; F. Munari, op. cit., p. 227; and F. Munari et al., op. cit., pp. 35 and 48.

G. Dosi, D. Teece, and S. Winter, ‘‘Les frontie ` res des entreprises: vers une th eorie de la coh erence de la grande entreprise,’’ Revue d’Economie Industrielle, vol. 51, no. 1 (1990), pp. 238– 54.
48 49 50

47

F. Munari, op. cit. J. J. Dooley, op. cit.

B. H. Hall, Z. Griliches, and J. A. Hausman, ‘‘Patents and R&D: Is There a Lag?’’ International Economic Review, vol. 27, no. 2 (1986), pp. 265–83, and Z. Griliches, ‘‘Patent Statistics as Economic Indicator: A Survey,’’ Journal of Economic Literature, vol. 28, no. 12 (1990), pp. 1661–707.
51 52

R. M. Margolis and D. M. Kammen, op. cit., p. 576.

The search of the USPTO database has two main advantages. First and foremost, it is far more flexible than any search of the equivalent European database. Then, considering patents granted in the United States for European companies indicates that we only consider significant patents and, thus, more representative of real research activity. Hence, it should be emphasized that relying on the USPTO database does not decrease the relevancy of the present analysis.
53

R. M. Margolis and D. M. Kammen, op. cit.

54 Namely, our basic search is as follows: ISD/$/$/year and ACN/(DE or AT or DK or ES or FI or FR or GR or IT or NO or NL or PT or GB or SE or CH) and ABST/((oil or coal or (natural and gas) or photovoltaic or network or pipeline or hydroelectric* or hydropower or nuclear or geothermal or solar or wind or hydrogen or (fuel and cell) or storage or efficiency or renewable) and (electric* or energy or power or generat* or turbine or compress*)). ISD, CAN, and ABST indicate the date, the country of the assignee, and the words to be found in the abstract, respectively.

The added code is therefore: AN/(Enel or RWE or Vattenfall or (Electricite and France) or EnBw or (Gaz and France) or VEBA or VIAG or (National and Power and PLC) or Suez). Note that firms with no patents are removed from the search described here.
56 R. M. Margolis and D. M. Kammen, op. cit. This finding of a more general framework than energy dates back to Z. Griliches, op. cit. and B. H. Hall et al., op. cit. 57 58

55

R. M. Margolis and D. M. Kammen, op. cit.

Indeed, the decrease in the share of granted patents by firms in panel A may be attributed to R&D externalization as described in the present paper. However, this allows us to conclude that there has been a large decrease in the ‘‘in-house’’ innovative activity of the firms under consideration, which is our primary interest.

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V. Jacquier-Roux and B. Bourgeois, op. cit.

60 F. Munari and R. Oriani, ‘‘Privatization and Economic Returns to R&D Investments,’’ Industrial and Corporate Change, vol. 14, no. 1, pp. 61–91, and F. Munari and M. Sobrero, ‘‘The Effects of Privatization on R&D Investments and Patent Productivity,’’ Fondazione Eni Enrico Mattei Research Paper (FEEM) Working Paper no. 64.2002, Milan, Italy, FEEM, 2005; a new version of this article is available at SSRN http://ssrn.com/abstract=331721. These works conclude that R&D productivity has increased in response to privatization. As discussed in A. Sterlacchini, op. cit., it could be due to a more patent-oriented policy (if there are a sufficient number of control variables). 61 62

See, for instance, the case of Laborelec.

Recall that the modification of R&D portfolios toward more applied projects is due not only to deregulation but also to privatization (cf. F. Munari, op. cit.). N. Johnstone, I. Hascic, and D. Popp, ‘‘Renewable Energy Policies and Technological Innovation: Evidence Based on Patent Counts,’’ Working Paper no. 13760, Cambridge, Massachusetts, National Bureau of Economic Research (NBER), 2008.
64 J.-M. Martin, ‘‘Des politiques technologiques mieux adapt ees,’’ in Energie et changement volutionniste, eds. B. Bourgeois, D. Finon, and J.-M. Martin (Paris: technologique–Une approche e Economica, 2000), pp. 423–44; J. J. Dooley, op. cit.; and F. Munari, op. cit. 65 66 67 63

J. J. Dooley, op. cit. R. M. Margolis and D. M. Kammen, op. cit.

F. Munari et al., op. cit. It could be argued that firms also may take advantage of spillovers from existing knowledge and not only duplicate R&D. At any rate, duplication would be difficult to avoid in such a context.
68 Social welfare considers the social impact of the decrease in the number of granted patents due to the slowdown in private R&D activity.

J. G. March, ‘‘Exploration and Exploitation in Organizational Learning,’’ Organization Science, vol. 2, no. 1 (1991), pp. 71–87. A typology of forms of ‘‘learning’’ is given in F. Malerba, ‘‘Learning by Firms and Incremental Technical Change,’’ Economic Journal, vol. 102, no. 413 (1992), pp. 845–59; ‘‘learning by doing’’ is presented in K. J. Arrow, ‘‘The Economic Implications of Learning by Doing,’’ Review of Economic Studies, vol. 29, no. 3 (1962), pp. 155–73; ‘‘learning by using’’ in N. Rosenberg, Inside the Black Box (Cambridge, Massachusetts: Cambridge University Press, 1982) refers to the repeated use of factors of production; ‘‘learning by searching’’ in R. Nelson and S. G. Winter, An Evolutionary Theory of Technical Change (Cambridge, Massachusetts: Harvard University Press, 1982) and G. Dosi, ‘‘The Nature of Innovative Process,’’ in Technical Change and Economic Theory, eds. G. Dosi, C. Freeman, R. Nelson, G. Silverberg, and L. Soete (London: Pinter Publisher, 1988), pp. 221–38, mostly resulting from R&D activities; and ‘‘learning by interacting’’ referring to interactions between the firm and upstream (suppliers) or downstream (users) sources, and cooperation between firms. The incremental nature of innovations deriving from the ‘‘learning’’ process does not permit any change in the technological path. An exception is
70

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187

the ‘‘learning by searching’’ which, by nature, is on the border between continuous change and paradigmatic ruptures. By executing their innovative activities, firms develop some models and procedures to solve problems. They are named ‘‘technological paradigm’’ (G. Dosi, ‘‘Technological Paradigms and Technological Trajectories,’’ Research Policy, vol. 11, no. 3 (1982), pp. 147–62) because they integrate the specific knowledge base toward a given technology, G. Dosi, ‘‘Opportunities, Incentives and the Collective Patterns of Technological Change,’’ Economic Journal, vol. 107, no. 444 (1997), pp. 1530–47. See G. Dosi, ‘‘Technological Paradigms and Technological Trajectories’’ and ‘‘Opportunities, Incentives and the Collective Patterns of Technological Change.’’
73 74 72 71

The pre-paradigmatic phase (cf. G. Dosi, ‘‘The Nature of Innovative Process’’).

J. S. Metcalfe and M. Boden, ‘‘Paradigms, Strategies and the Evolutionary Basis of Technological Competition,’’ in New Technologies and the Firm, ed. P. Swann (London: Routledge, 1993), pp. 83–102.
75

A. D. Sagar and B. van der Zwaan, op. cit.

76 G. Dosi, ‘‘Technological Paradigms and Technological Trajectories,’’ ‘‘The Nature of Innovative Process,’’ and ‘‘Opportunities, Incentives and the Collective Patterns of Technological Change.’’ 77

F. Munari, op. cit.

78 J. Martin, op. cit.; D. Teece, ‘‘Technical Change and the Nature of the Firm,’’ in Technical Change and Economic Theory, eds. G. Dosi, C. Freeman, R. Nelson, G. Silverberg, and L. Soete (London: Pinter Publishers, 1998), pp. 256–80; and R. Nelson and S. G. Winter, op. cit.

B. J. Loasby, ‘‘Organisational Capabilities and Interfirm Relations,’’ Metroeconomica, vol. 45, no. 3 (1994), pp. 248–65. This is known as the ‘‘forget-by-not-doing’’ phenomenon. See, also, R. Nelson and S. G. Winter, op. cit., p. 64. D. Popp, ‘‘They Don’t Invent Them Like They Used To: An Examination of Energy Patent Citations Over Time,’’ Economics of Innovation and New Technology, vol. 15, no. 8 (2006), pp. 753–76.
81 82 80

79

However, the estimate of this effect is not always significant.

D. Guellec and B. van Pottelsberghe de la Potterie, ‘‘The Impact of Public R&D Expenditure on Business R&D,’’ Economics of Innovation and New Technology, vol. 12, no. 3 (2003), pp. 225–43. R. A. Bell and T. R. Schneider, ‘‘Balkanization and the Future of Electricity R&D,’’ Electricity Journal, vol. 12, no. 6 (1999), pp. 87–98. A. Sterlacchini, op. cit., notes that public funding alone may not be a good solution to compensate for the lack in private R&D described in the present paper, because, first, government usually funds basic research, which is less transferable to the private sector, and, second, because European countries have increasing budget constraints. The first argument supports the advantageousness of ‘‘in-house’’ R&D.
83

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84 For ‘‘other power and storage techniques,’’ these mostly consist of ‘‘electricity distribution and transmission’’ and ‘‘transformation of electric power.’’ 85 86

J. Dooley, op. cit.

The Public Service Obligation also funds R&D projects in the domain of biomass, fuel cells, ocean energy, etc.
87 88 89 90

Note that Denmark also has removed nuclear energy from its energy portfolio. Eurelectric, op. cit. Act 79/1999 of March 16 fixing a 0.05 euro tax for each kilowatt-hour (kWh) consumed.

The Italian government has declared that no ambiguity should exist about the aim of ENEA, whose main function is to compensate for the R&D deficit in investment following deregulation.
91 J. A. Schumpeter, The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest, and the Business Cycle (Piscataway, New Jersey: Transaction Publishers,1982), and Capitalism, Socialism, and Democracy (New York: Harper Perennial Modern Classics, 2008).

S. Thomas, ‘‘The Future of Research and Development in the UK Gas Industry,’’ Report of the Public Service International Research Unit (PSIRU), University of Greenwich, Greenwich, United Kingdom, 2004, available at http://www.psiru.org/reports/2004-04-E-UK-Advantica.doc.
93 94 95 96 97 98 99

92

J. Dooley, op. cit., and R. M. Margolis and D. M. Kammen, op. cit. N. Johnstone et al., op. cit. C. Defeuilley and A. T. Furtado, op. cit. Considering its environmental impact, this is a positive externality from a social point of view. D. Popp et al., op. cit. C. Defeuilley and A. T. Furtado, op. cit. V. Jacquier-Roux and B. Bourgeois, op. cit.

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