23‐05‐2021

Energy in Transition (EIT)

PGDM(E) 2020‐21 
(20th May 2021)

By:
Prof. Brijesh Bhatt
Assistant Professor
NTPC School of Business

Module II:Transition in regulatory structure: National & international

experiences

Session 9: Understanding transition and regulation

Session 10: National experiences: Case of Electricity Distribution Transition

Session 11: International experiences: German Energy Transition (Energiewende)

Session 12: International experiences: Regulatory Transition in UK: RIIO

Lecture Outline

 Context: Understanding Energy Transition:

 Technology adoption, innovation, technical change

 Understanding Regulation:
 Dimensions of regulation (substance, governance, behavioural)

 Regulation for Energy Transition

 Impact of different tools on innovation in electricity industry

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1. Energy Transition
C‐intensive
GHG emissions  Climate change concerns
 Environmental impact
 Health & Social impact

Present Energy system  (Urgent)
(Fossil fuel based) Need to replace

Transition to 
Sustainable consumption Who is driving this transition?
what?

― Walking
― Biking, and so on C‐Neutral
Net‐zero
Sustainable
Energy system

Clean Coal  Energy Storage  Energy  Green 

Renewable Energy Hydrogen EV
Technology Systems Efficiency buildings

Centralized Decentralized

1. Energy Transition

“a change in fuels and their associated technologies,” 
“a shift in the fuel source for energy production and the technologies used to exploit that fuel,” 
“a particularly significant set of changes to the patterns of energy use in a society, potentially 
affecting resources, carriers, converters, and services,” 
“the switch from an economic system dependent on one or a series of energy resources and 
technologies to another,” 
“the time that elapses between the introduction of a new primary energy sources or prime mover, 
and its rise to claiming a substantial share of the overall market” 
(Cernoch 2017, p. 12)

Broadly, energy transition is a socio‐technical transition 

“a gradual process of societal change, spanning the economy, 
technology, organizations, rules, systems, values and behaviors –
essentially, a profound change in the way in which society operates” 
(Andrews‐Speed, 2016, p. 217)
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1. Energy Transition
Understanding energy transition as sociotechnical system

Technology
With integrated technical sub-
6 5 systems

Institutions and Governance

Structures 2 1
The rules and their implementation
structures

3 Actors
Individuals, Organizations,
4 Social groups
1. Selection of technology by actors 4. Actors carry and reproduce the rules
2. Technology need human actors to perform 5. Rules also determine the type of
and actors decisions are also influenced by technology technology available
3. Actors perception and (inter)actions are 6. Technological innovations can shape rules
guided by rules 6
Source: Bhatt (2020)

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1. Energy Transition

Institutions

Transaction New rules affect

cost lowering governance form
technology
enables new
Governance Ideology shapes
New governance
Structures like governance forms
Technology forms
Regulation indirectly through
Influencing political
Opportunism and action
bounded rationality make
governance necessary
Actors
Adoption of new
technology changes
interaction among
actors

1. Energy Transition
The 1st energy transition, the primitive sources (human muscles, occasional use of fire) were supplemented by 
the power of domesticated draft animals and systemic usage of fire for the production of metals and glass.

The 2nd transition came a few millennia later, when waterwheels and windmills were mastered. 

The 3rd one untapped the vast reservoir of energy hidden in fossil fuels (mainly coal), leading to the beginning 
of the Industrial Revolution in the 18th Century. 

The most recent one has been marked by the introduction of electricity and the dissemination of new energy 
resources; oil, natural gas, nuclear energy. 

These transitions constituted the significant steps in the development of human society, affecting dramatically 
every aspect of human existence. 

Now, yet another transition seems to be on its way. This is driven by climate change concerns, and the primary 
goal of this transition is to decarbonize the world economy. 

1. Energy Transition
Terms used in study of new technology

 Innovation – use/introduction of something new (technology, idea, method….)

 Incremental
 Radical

 Diffusion – aggregated spread of an innovation in a system, result of adoption

decisions of different members distributed over time
 Roger’s diffusion curve

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Source: Stroub 2009

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1. Energy Transition
Factors for adoption of new technology - 1
• Barriers
 e.g. ?
 Technical
 Financial
 Organizational
• Market structure
• Firm size
 Larger firm – economies of scale and scope
 Smaller firm - ? (present scenario)
• Evolutionary perspective
 Routines
 Learning costs
• Lock-in 10

1. Energy Transition

Factors for adoption of technology - 2

Technology push versus market pull

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1. Energy Transition
 And in a regulated industry?

Regulation can influence innovation in infrastructure sectors in both positive and

negative ways (Firth and Mellor 1999).

Regulations can trigger pollution abatement expenditures and serve as a positive impact
on the environment. As a negative impact, regulatory differences can constitute barriers
to market access, hinder technical advancements and technology diffusion, conflicting
competition, financially aggressive or subdued procurement environment & impact
intellectual property laws.

Thereby, on one hand, regulation can distort a firm's product/process choices, while on
other hand it can create barriers for certain innovations affecting infrastructure service
delivery. There is a need to understand the impact of different regulatory practices on
technological innovation in the infrastructure sector.
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1. Energy Transition

Key questions for energy transition:
 How does regulation shape technology adoption decisions of a firm?
 To what degree the existing regulatory framework acts as a constraint on 
new technology adoption?
 Which regulatory interventions are used to facilitate certain types of 
innovation rather than others?
 How innovations might be a result of particular regulatory arrangements 
in the first place.

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Lecture Outline
 Context: Energy Transition
 Understanding Transition: Technology adoption, innovation, technical change

 Understanding Regulation:
 Three dimensions of regulation (substance, governance, institutional environment)
• Introduction
• Need of Regulation: Second best!
• When regulatory incentives work, how to design them? [R1]
• Profit regulation: ROR / Cost plus Regulation (variants and challenges/issues)
• Performance based regulation
• Efficiency based: Yardstick
• When/why incentives are ineffective? [R2]

For a brief summary on fundamentals of regulation refer to GTZ (2003)

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II. Understanding Regulation

Why Regulate?
• Market failure: Sometimes markets can fail to operate in beneficial way. Market failure can serve 
as to merit regulation. Market can fail because:
Information asymmetry: consumers unable to assess the quality of the service/product they are 
buying (e.g. power quality, drinking water quality, safety of transport vehicles)

Externalities: Actions of agent A effect welfare of B (e.g. environmental costs associated with 
GHG emissions in power sector, sewerage disposal in sanitation and pollution inn transport 
sector)

Market power: Ineffective competition actual or potential, monopoly, cartel 

Natural monopoly: Industry cost is minimized by having only firm in the industry, average costs 
are declining 
• Social concerns: Infrastructure (goods/services) may be considered ‘essential’ to life, and 
therefore regulation may be enacted so as to guarantee access to these services.
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II. Understanding Regulation

Differentiating Act, Regulation, Policy and Schemes: A framework

Source: Williamson 2000: 597 16

II. Understanding Regulation

What is Regulation?
A diverse set of instruments by which government or organizations to 
which the government has delegated powers, set requirements on 
enterprise and citizens 
Regulations include laws, formal & informal orders & rules issued by 
regulatory bodies 
Action that simulates market outcomes in the absence of a market
“The single most widely accepted rule for the governance of the regulated industries is regulate 
them in such a way as to produce the same results as would be produced by effective competition, 
if it were feasible” Dr. Alfred Kahn, The Economics of Regulation: Principles and Institutions (1970)

Regulation involves: setting rules, monitoring behaviour and enforcing rules 
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II. Understanding Regulation

What is regulation trying to accomplish?

Through its actions, make the utility behave more like a competitive firm
 Improve the quality of service
Act as a surrogate for the market by driving prices to cost

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II. Understanding Regulation

What are different forms of regulation?

Social Regulation: Effect of infrastructure reforms on poor consumers. Controls undesirable 
consequences of firm behaviour to obtain various social goods such as clean air and water, safe 
products and workplaces (safety regulations, consumer rights, labour rights, pollution control acts 
etc.) 

Economic Regulation: economic regulation where individuals or organizations are compelled by the

government to comply by certain market related behavior.
Structural Regulation: deals with market structure and its regulation, for example, by rules on
entry or exit or by rules on which services to supply and which not.

Conduct Regulation: concerns with the behavior of producers and consumers such as through
price controls, product labeling, quality standards, compliance with intellectual property regimes
etc.

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II. Understanding Regulation

Who Regulates?

REGULATION BY STATE REGULATION BY EXPERT  REGULATION BY INDEPENDENT 

COMMITTEES  REGULATORY BODIES 

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II. Understanding Regulation

Theories of Regulation
Public Interest Theory: Assumes regulators have sufficient information & enforcement power to effectively promote 
the public interests (Hertog 2010: 1). 

Private Interest Theory: Assumes regulators do not have sufficient information with respect to cost, demand, quality 
and other dimensions of firm behaviour, thus, can imperfectly, if at all, promote the public interests. Hence, all actors 
pursue their own interests, which may not include elements of public interests (Hertog 2010: 1)   

Academic  Long academic debate on regulation (within the broader 
domain of governance), leading to many Nobel laureates 
debate on  including,
regulation  • Joseph E. Stiglitz  in 2001
• Oliver Williamson in 2009
• Jean Tirole in 2014
• Oliver Hart and Bengt Holmström (Contract theory) 
in 2016 21

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II. Understanding Regulation

Source: Berg 2009

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II. Understanding Regulation

R2

Influence of 
Institutional 
Endowment

Regulatory Tools / Instruments R1

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R3

II. Understanding Regulation

Dominant Paradigm of Regulation (R1)

Incentive 
based RIIO or for 
Cost  Price or  innovation
Plus /  Revenue 
ROR

Regulatory Tools / Instruments

Increasing Incentives 
R1

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II. Understanding Regulation

R1: Regulatory substance/tools/instruments
• Rate of Return regulation (ROR): Rate of return regulation is a cost‐plus mechanism whereby
regulators fix the rate of return the utility can earn on its assets. They set the price the utility can
charge so as to cover all main operating costs and to allow it to earn a specified rate of return.
Limitations: Little incentives to encourage efficiency; encourages over‐investment (gold plating/ A‐J effect)

• Performance based regulation (PBR): Profits earned by the utility are linked to certain
performance targets set ex‐ante. May shares risk and rewards between utility and consumers.
RPI‐X (https://www.youtube.com/watch?v=NSmaCykRMXs : Interview with Prof. Stefan Littlechild/founder of
incentive regulation)
Limitations: Data adequacy, utility sensitivity to incentives

• Yardstick regulation: Revenue allowances are linked to industry average performance/set price
equal to average cost of comparable utilities.
Problem hard to find comparable utilities e.g. local electricity distribution companies

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II. Understanding Regulation

Regulatory Governance (R2): Significance for less industrialized economies

institutions
Formal 
Influence of institutional

R2
Regulatory 
endowment

capture 

institutions
Informal 

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Definitions and qualitative indicators for regulatory governance input attributes

Regulatory governance 
Definition Indicator/Questions
input attribute
 Refers to the clarity of the roles and  We measure the clarity of roles, rules and objectives in 
responsibilities assigned to the regulating  relation to 6 indicators: 
 Does the primary legislation or the legal 
entity; 
instrument that governs the regulating entity 
 Refers to the specification of roles, 
clearly set out a description of its roles, functions 
responsibilities and regulatory objectives in  and responsibilities? 
the formal‐legal documentation that   Does the primary legislation or the legal 
governs the regulating entity;  instrument that governs the regulating entity 
 Refers to the clarity of rule ownership and  clearly set out its regulatory objectives? 
the extent to which confusion of rule   Are certain roles or responsibilities for rule making 
ownership is avoided carried out jointly with other administrative 
1.Clarity of roles and  entities, ministries or agencies?
 Does the regulating entity have responsibility for 
objectives regulatory oversight and the commercial 
promotion of the sector?
 Does the primary legislation or the legal 
instrument that governs the regulating entity 
clearly demarcate between functions associated 
with oversight versus policy development?
 Does the primary legislation or the legal 
instrument that governs the regulating entity 
clearly specify its role and jurisdiction in relation to 
decision making versus an advisory role?

27
Source: Jarvis and Savacool 2011:4343

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Definitions and qualitative indicators for regulatory governance input attributes

Regulatory governance 
Definition Indicator/Questions
input attribute
 Refers to the availably and sufficiency 
We measure capacity in relation to 4 
of both financial and human resources 
indicators: 
to undertake and discharge to a high 
 Is the regulating entity appropriately 
level the requirements stipulated in its 
resourced relative to its mandated 
mandate;
role(s) and responsibilities? 
 Refers to adequate resourcing in the 
 Does the regulating entity have access 
case of budget provisions or access to 
to independent revenue streams that 
2.Capacity revenue streams that enable the 
guarantee its operations?
regulating entity to act relatively free of 
 Does the regulating entity enjoy budget 
resource constraints; 
stability from year to year?
 Refers to the ability to attain sufficient 
 Is the regulating entity able to attract 
regulatory capacity in respect of 
and retain personnel with the 
regulatory staff with the appropriate 
appropriate technical skills, knowledge 
technical skills, relevant knowledge and 
and experience?
experience

Source: Jarvis and Sovacool 2011:4343
28

Definitions and qualitative indicators for regulatory governance input attributes

Regulatory governance 
Definition Indicator/Questions
input attribute
 Refers to the ability of the regulating  We measure autonomy in relation to 5 
entity to act and render objective, fair indicators: 
and impartial decisions in the   Does the regulating entity enjoy 
interests of all stakeholders;  independence from the government (e.g., 
 Refers to the ability of the regulating  statutory authority)? 
entity to act beyond the interests of   Does the regulating entity enjoy budget 
specific constituencies;  autonomy in the discharge of its 
 Refers to the mechanisms and  mandate?
procedures put in place that help   Are members of the regulating entity 
3.Autonomy ensure the regulating entity is not  appointed on the basis of merit and in an 
captured by government or private  open, transparent and fair appointments 
sector interests process?
 Are members of the regulating entity 
protected from arbitrary dismissal by the 
government or other constituencies?
 Does the regulating entity have rule and 
decision authority or only an advisory 
capacity? 29
Source: Jarvis and Sovacool 2011:4343

Definitions and qualitative indicators for regulatory governance input attributes

Regulatory governance 
Definition Indicator/Questions
input attribute
 Refers to mechanisms that hold 
We measure accountability in relation
government and public/private sector 
to 5 indicators: 
actors accountable and ensure 
 Is there a formal set of accounting and 
appropriate conduct; 
reporting procedures in place (to 
 Refers to the processes and procedures 
government, to the public,
via which the regulating entity reports 
to key stakeholders?) 
and accounts for its activities in 
 Can the regulator be dismissed for 
relation to its mandate and the 
failing to fulfill its duties? 
discharge of its duties; 
4.Accountability  Are formal accountability mechanisms 
 Refers to the mechanisms for 
enshrined in the mandate of the 
interested parties to challenge the 
regulating entity? 
regulating entity’s decisions or rulings; 
 Are formal mechanisms for 
 Refers to the mechanisms, processes 
redress/dispute resolution proscribed 
and instruments available to 
in the mandate of the regulating 
stakeholders to seek redress or have 
entity?
the decisions or actions of the 
 Is there a process for judicial review in 
regulating entity reviewed by an 
the case of disputes?
external party 30
Source: Jarvis and Sovacool 2011:4343

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Definitions and qualitative indicators for regulatory governance input attributes

Regulatory governance 
Definition Indicator/Questions
input attribute
 Refers to the process of revealing the  We measure transparency in relation to 6 
assumptions and information on which  indicators: 
decisions and actions are made, so that   Are major regulatory documents in the
outside observers can scrutinize them; public domain?
 Attributes of transparency refer to   Does the regulatory entity publish major
i. how timely information is made  decisions?
available;   Is there a voluntary or compulsory code of 
ii. the processes and procedures for disclosure in place for regulatory rulings and 
recording, storing and transmitting  decisions?
information;   Does the regulating entity have a policy in 
5.Transparency
iii. the policies indicating what  place for transparency and disclosure?
information is to be made available   Does the regulating entity record and store 
(disclosed);  its information sources, documentation and 
iv. the extent to which the regulating  other external inputs on which its decisions 
entity is willing to allow external  are made?
access to decision making   Does the regulating entity disclose/publish 
processes/information sources the information sources on which its 
decisions are based and the methods via 
which issues like tariff adjustments are 
determined?

Source: Jarvis and Sovacool 2011:4343 31

Definitions and qualitative indicators for regulatory governance input attributes

Regulatory governance 
Definition Indicator/Questions
input attribute
 Refers to the ability and willingness of the We measure participation in relation to 6 
regulating entity to canvas diverse  indicators:
opinions, integrate the opinion of multiple  Does the regulating entity have procedures 
stakeholders into its decision making  and mechanisms in place to consult widely?
processes, and allow for mediation of   Does the regulating entity hold public 
different points of view in open forums,  forms/events/meetings that are open to the 
public events and through written and  public/industry stakeholders?
oral submissions  Does the regulating entity allow written and 
oral submissions to its decision making bodies?
6.Participation  Does the regulating entity publish or make 
publicly available all submissions from the 
public/stakeholders?
 Is the regulating entity required to respond 
formally to public submissions?
 Is there any evidence that public participation 
and consultation processes influence the 
decisions or operations of the regulating 
entity?

Source: Jarvis and Sovacool 2011:4343
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Regulatory governance, Substance, and Sector outcomes

Regulatory Substance
Regulatory Governance  Access
 Autonomy  Service Quality
 Clarity of roles and objectives  Tariff (Price) Decisions
 Capacity  Subsidies
 Accountability  Licensing
 Transparency  Accounting and Reporting
 Predictability  Efficiency
 Participation  Financial Performance
 Integrity  Investment and Maintenance
 Credibility  Equity
 Legitimacy  Sustainability
 Market composition and competition

How can sector outcomes be How can sector outcomes be
explained by regulatory explained by regulatory
governance? substance?

Sector Outcomes
 Capacity (installed capacity, installed technology)
 Output and consumption (access levels, demand)
 Efficiency (employment, productivity, losses)
 Service quality (quality, service continuity, customer satisfaction)
 Financial performance (operating results, capital structure)
 Investment and maintenance (capex, maintenance)
 Prices (cost reflectivity, prices)
 Equity (affordability, subsidies)
 Environment (resource mix, emissions) 33
Source: Jarvis and Sovacool 2011:4342

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II. Understanding Regulation

Evaluation of Regulatory Substance (R1) and Regulatory Governance (R2) for the
State Electricity Regulatory Commissions in India (The World Bank 2014: 118)
A comparison of SERC: key regulatory substances

34

II. Understanding Regulation

Evaluation of Regulatory Substance (R1) and Regulatory Governance (R2) for the
State Electricity Regulatory Commissions in India (The World Bank 2014:120 )
A comparison of SERC: Regulatory governance/ Institutional design scores 

35

II. Understanding Regulation

Behavioural aspects of Regulation (R3)

R3
Gencer et al. (2020) provide a brief on behavioural regulation
with respect to electricity markets
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References

Andrews‐Speed (2016) Applying institutional theory to the low‐carbon energy transition. Energy Research & 
Social Science, pp. 216‐225. 
Berg S. V. (2009) Characterizing the efficiency and effectiveness of regulatory institutions. University of Florida
Bhatt B. (2020) Institutional reforms, governance structures and technology adoption: Evidence from the Indian 
electricity distribution sector.  
Cernoch F. (2017) Energy Transition: the Case Study of Germany and the Czech Republic
Firth L., and Mellor D. (1999) The impact of regulation in innovation. European Journal of Law and Economics 
8:199‐205.
GTZ (2003) Infrastructure regulation. An introduction to fundamental concepts and key issues. Working paper 
no. 10. 
Hertog J. (2010) Review of economic theories of regulation. Discussion paper series 10‐18. Utrecht School of 
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Thank You

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