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

8/13/2019 Decreasing R&D Expenditures in the European Energy Industry and Deregulation, by Olivier Grosse and Benot Svi

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THE JOURNAL OF ENERGY

AND DEVELOPMENT

Olivier Grosse and Benot Svi,

Decreasing R&D Expenditures in

the European Energy Industry

and Deregulation,

Volume 38, Number 2

Copyright 2013


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DECREASING R&D EXPENDITURES IN THE

EUROPEAN ENERGY INDUSTRY

AND DEREGULATION

Olivier Grosse and Benot Sevi*

Introduction

It is often argued in economic literature that energy research and development(R&D) expenditures have been curtailed in response to liberalization policiesthat have been enacted in recent years.1 The decrease in R&D budgets generally 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 Eu-

ropean 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 Universite Paris-1 Pantheon-Sorbonne. His research interests are in the

technology innovation process of firms, in general, and of energy firms following deregulation,

in particular.Benot Sevi 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 2013 by the International Research Center for Energy and Economic Development(ICEED). All rights reserved.

157


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(mainly in generation capacity). Generally, it is argued that investment disin-

centives are related to uncertainty following the opening of markets to competi-

tion. But analysis of the consequences of liberalization on R&D investments 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

incompleteas argued by A. Sagar and J. Holdrenit is of interest to consider the

evolution of R&D budgets in members of the Organization for Economic Co-

operation 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 con-

clusion in the article by N. Rose and P. Joskow that . . . large firms and investor-

owned electric utilities are likely to adopt new technologies earlier than are their

smaller and publicly owned counterparts may not hold under more realistic as-

sumptions, namely, that companies compete greatly for market shares and cus-

tomer loyalty.4

The role of technical change within the field of environmental economics re-

cently has been surveyed in D. Popp et al.5 The authors provide an 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 fund-

ing of research and development (R&D) often provides the first impetus for developing new

environmental technologies. (Emphasis in bold added)6

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 thepresent 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 in-

novation 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 shouldencourage 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.

THE JOURNAL OF ENERGY AND DEVELOPMENT158


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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 liber-

alization, we only consider firms in the electricity industry or gas distributionand not oil. To the extent of our knowledge, only two papersA. Sterlacchini

and T. Jamasb and M. Pollittprovide 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 non-

substitution 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 mostemissions, 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 lib-

eralization and climate policy.12

Second, following the United Nations Educational, Scientific and Cultural

Organizations (UNESCOs) 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 implica-tions for food and nutrition, the medical-related domain, education, and quality of

life. Thus, the international community faces an accessibility-sustainability di-

lemma, 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 createand maintain a competitive position in the energy innovative industry (cf. the

position of German firms in wind energy).

EUROPEAN ENERGY R&D AND DEREGULATION 159


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To address the different issues highlighted above, we first proceed by ad-

vancing 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 governmentsare concerned, budgets have declined because of political choices and budgetary

constraints.

Despite the fact that we are mainly interested in in-house innovation ac-

tivity, 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 de-

cline 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 in-

dustry).14 By financing R&D projects, the government may crowd out private-

sector 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 deregu-

lated 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 under-

investment by private firms.

17

We empirically explore this issue in the third sectionof 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 underconsideration 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 decreasein 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 util-

ities). 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 col-lected 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 theSecurity and Exchange Commission. In all cases, data are concordant. The

14 firms finally constituting our panel include: Suez (France), Electricite 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 Electricite 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 eachfirm 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 nation-panel 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 ac-

cordingly. 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 Electricite 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 turn-

overs generally have increased in response to the liberalization.

The dramatic decline in R&D expenditures can be explained by a quasi-

complete 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 CESIscapital. CESI is responsible for almost all system research for Italy, even though

Enel kept Conphoebus, a subsidiary solely attempting to develop innovations in



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Figure1

ENE

RGYINTENSITYFORMAJO

REUROPEANUTILITIES,19952007

(researchanddevelopment/salesasapercentage)

Source:Compiledfromannualreportsoffirmsbytheauthors.



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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 Electricite de France (EDF) is a good example of what F. Munariposited 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 ex-

plain the extent to which the firm withdrew from R&D.33 It also should be noted

that the single largest portion of EDFs R&D budget is directed toward nuclear

waste treatment solutions (32.1 percent of the 2002 budget) andnot to the de-

velopment 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-to-

be-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 firms 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 organi-

zation 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 comple-

mentary, explanation in EURELECTRICs 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 de-veloping 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 Laborelecs 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 morestringent. 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

increase their market share.44 In such a framework, liberalization appears favor-

able in the short term for consumers because of the emergence of more customer-

oriented 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. Munaris 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 andthe 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



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Figure2

POTENTIALCONSEQUE

NCESOFENERGY-SECTOR

DEREGULATIONONRESEARCHANDDEVELOPMENT

(R&D)EXPE

NDITURESBYFIRMSAND

THENONPRIVATEANDSO

CIALRETURNS



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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 con-sequences 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 in-

novation 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 compres-sor, 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 numberof 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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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 ob-servations from R. Margolis and D. Kammen, who found a dramatic decline for

the period 19761996.57 Of course, our reference period is very different, but the

Figure 3ENERGY TECHNOLOGY NUMBER OF PATENTS GRANTED BY THE

UNITED STATES PATENT AND TRADEMARK OFFICE FOR

EUROPEAN COUNTRIES AND FIRMS, 19902007a

aThe 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), Electricite 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.



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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 environ-

mental policy.63

For quantity-based policies (e.g., mandates), R&D is directed towardthe most competitive technologies (wind) that are most likely to compete with

existing technologies. When environmental policy relies on price-based in-

struments 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 companys

knowledge output.

In addition, while technological change in the energy industry used to be re-

lated 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 es-tablish 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-

Table 2PERCENTAGE OF ENERGY TECHNOLOGY PATENTS GRANTED BY THE

UNITED STATES PATENT AND TRADEMARK OFFICE ATTRIBUTED

TO FIRMS IN PANEL A, 19902007

Year Percentage

1990 31.63%

1991 37.04%

1992 16.49%

1993 22.83%

1994 20.51%

1995 30.11%

1996 22.86%

1997 29.29%

1998 28.46%

1999 14.29%

2000 14.29%

2001 14.74%

2002 11.50%

2003 6.11%

2004 2.22%

2005 6.15%

2006 2.74%

2007 3.11%

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



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house R&D, which is likely to be better adapted to the firms 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 con-

sider the short-term consequences on private profitability as ambiguous and those

on social welfare as potentially negative (see figure 2, effects 9 and 11, re-

spectively).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, ef-

fects 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. Marchs research, we see that knowledge accumulation can be

achieved through two strategies: exploitation or exploration.

69

The dilemmaexploitation vs. exploration within the enterprise can be spelled out as follows:

the companys short-term survivorship requires an efficient exploitation of

existing resources and knowledge, whereas long-term survivorship calls for ex-

ploring for new technological opportunities and developing new technological

competencies. J. March points out that improving the companys 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 enterprises technological trajectory. 70

When pursuing exploration strategies, it appears that radical innovations canemerge 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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18/33

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 governments 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 phenomenonwhich is well known in publiceconomicsincreased 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. Un-

fortunately, the analysis of the evolution of public R&D budgets in European

countries shows a large decrease over the 19852006 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 havedecreased 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 19851997 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 bud-

gets 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 about3 percent per year, public budgets only will reach their 1985 levels in real terms

around 2018.



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Figure4

ENERGYRESEARCHANDDEVELOPMENT(R&D)PUBLICBUDGETSFOROUR

PANELOF13COUNTRIESa

(inbillionsofeuros)

aThe

13countriesare:Austria,Denm

ark,Finland,France,Germany

,Italy,Netherlands,Norway,P

ortugal,Spain,Sweden,Switzerland,andthe

UnitedK

ingdom.

Source:Compiledbyauthorswithda

tafromtheInternationalEnergyAgency(IEA),EnergyStatisti

csofOECDCountries(Paris:IEA,2009).



20/33


21/33

energies R&D follow a similar trend compared to other IEA countries. In

summary, for European countriesas for IEA countries as a wholethe 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 wit-

nessed 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 19851995, thus has been accentuated during the subsequent

years.85 This is true at the worldwide level and at a European level as wellboth 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 en-

courage energy R&D but, rather, provide some illustrations of these kinds of

policies. Two types of policy measures are worth highlightingnote that these arenot exclusiveand 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 fi-

nanced 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 (Ris National Laboratory, technical institutes, universities, and



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Figure5

SHAREOFENERGYR

ESEARCHANDDEVELOPM

ENT(R&D)BUDGETSASA

PERCENTAGEOFGROSS

DOMESTICPRODUCT(GDP)INSELECTEDEUROPEANCOUNTRIES,19952006

(in

percent)

Source:CompiledbyauthorswithdatafromtheInternationalEnergyAgency(IEA),EnergyStatisti

csofOECDCountries(Paris:IEA,2009).



23/33

Figure6

SHAREOFENERGYRESEARCHANDDEVE

LOPMENT(R&D)BUDGETS

ASAPERCENTAGE

O

FGROSSDOMESTICPRODU

CT(GDP)BYREGION,1985

2006

(in

percent)

Source:Compiledbyauthorswithd

atafromtheInternationalEnergyAgency(IEA),EnergyStatisticsofOECDCountries(Paris:

IEA,2009).



24/33

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 countrys 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

agencys 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 cen-

tralized R&Ddespite appearing at first in total opposition to the liberal policy

that led to deregulation in the first placeis 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). Thisalso 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

utilitys 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 com-

panies 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 firms 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, decen-

tralized management of a national energy R&D raises the issue of both eco-

nomic 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 producerssometimes



25/33

individualsthat 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 in-

terests 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 in-

novation deriving from a program where public funding existseven at a mod-

erate funding levelis 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. Swedens approach

to R&D organization is similar. A common institution, Elforsk, is in charge of

R&D for Vattenfall, Sydkraft, and Birka, the nations 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 thefund-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 objec-

tives 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



26/33

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 envi-ronment 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 wit-

nessed 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 hassignificantly 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 liber-

alization. But it is doubtful that the point to which R&D has declined to during

recent years was in the publics interest. Indeed, the issues we developed in this

articles introduction, such as the environment, long-term competitiveness, and

better accessibility to energy for poorer nations, should speak in favor of a sig-

nificant increase in energy activity. Our main contribution in this paper was toshow 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. Jacquier-

Roux and B. Bourgeois but not detailed in it.99 This would permit a better un-

derstanding 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? Ofcourse, R&D decomposition becomes a very strategic variable in times of com-

petition; thus, it becomes harder to gather information on this cogent subject.



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NOTES

1J. J. Dooley, Unintended Consequences: Energy R&D in a Deregulated Energy Market,

Energy Policy, vol. 26, no. 7 (1998), pp. 54755; 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. 57584; C. Defeuilley and A. T. Furtado, Impacts de

louverture a la concurrence sur la R&D dans le secteur electrique, Annals of Public and Co-

operative Economics, vol. 71, no. 1 (2000), pp. 528; 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. 399417; G. F. Nemet and D. M. Kammen, U.S. Energy R&D: Declining In-

vestment, Increasing Need, and the Feasibility of Expansion, Energy Policy, vol. 35, no. 1

(2007), pp. 74655; 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. 4610614.

2A. D. Sagar and J. P. Holdren, Assessing the Global Energy Innovation System: Some Key

Issues, Energy Policy, vol. 30, no. 6 (2002), pp. 46569.

3T. Jamasb and M. Pollitt, Liberalisation and R&D in Network Industries: The Case of the

Electricity Industry, Research Policy, vol. 37, nos. 67 (2008), pp. 9951008.

4N. 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.

5D. Popp, R. G. Newell, and A. B. Jaffe, Energy, the Environment, and Technological

Change, NBER Working Paper no. 14832, Cambridge, Massachusetts, National Bureau of Eco-nomic Research (NBER), April 2009.

6Ibid., p. 1.

7P. 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. 4180, examine the

U.S. case.

8

R. M. Margolis and D. M. Kammen, op. cit.9C. 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.

10T. Jamasb and M. Pollitt, op. cit.

11A. 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 45, 2007, available at http://www.intertic.org/Conference/

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

12J. J. Dooley, op. cit.; for a recent discussion on this issue also see G. F. Nemet and D. M.

Kammen, op cit.

http://-/?-http://-/?-http://-/?-http://-/?-


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13A. Sterlacchini, op. cit.

14E. 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. 56271.

15P. A. David, B. H. Hall, and A. A. Toole, Is Public R&D a Complement or Substitute forPrivate R&D? A Review of the Econometric Evidence, Research Policy, vol. 29, no. 4 (2000),

pp. 497529.

16The 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. 60925.

17D. Popp et al., op. cit., p. 21.

18L. M. Branscomb and P. E. Auerswald, Between Invention and Innovation: An Analysis ofthe 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.

19C. Defeuilley and A. T. Furtado, op. cit.

20P. Sanyal, The Effect of Deregulation on Environment Research by Electric Utilities,

Journal of Regulatory Economics, vol. 31, no. 3 (2007), pp. 33553.

21G. 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. 1753762.

22J. Markard, B. Truffer, and D. M. Imboden, The Impacts of Market Liberalization on In-

novation Processes in the Electricity Sector, Energy & Environment, vol. 15, no. 2 (2004),

pp. 20114, and V. Jacquier-Roux and B. Bourgeois, op. cit.

23V. Jacquier-Roux and B. Bourgeois, op. cit.

24The oil sector also cannot serve as a control group because of its very particular dynamics.

25A. 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. 2601608.

26T. 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.

27R. M. Margolis and D. M. Kammen, op. cit.

28For the year 2006, only data on Endesa are missing.

29J. Percebois, Ouverture a la concurrence et regulation des industries de reseaux : le cas du

gaz et de lelectricite,Revue dEconomie Publique, vol. 12, no. 1 (2003), pp. 7198. At this point,



29/33

two remarks deserve consideration. First, the relatively few number of countries (and firms) con-

sidered 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.30For these firms, R&D intensities for the year 2006 are 0.05 percent, 0.006 percent, 0.04

percent, and 0.05 percent, respectively.

31See the section on Encouraging Energy R&D Investment for further developments.

32F. Munari, The Effects of Privatization on Corporate R&D Units: Evidence from Italy and

France, R&D Management, vol. 32, no. 3 (2002), pp. 22332.

33It 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).

34C. Kemfert, The European Electricity and Climate PolicyComplement or Substitute?,

Environment and Planning C, vol. 25, no. 1 (2007), pp. 11530.

35F. Munari, op. cit.

36Note that this is exactly the opposite for pollution, which delivers negative externalities, and is

overproduced in a purely competitive framework.

37P. A. Geroski, Models of Technology Diffusion, Research Policy, vol. 29, nos. 45 (2000),

pp. 60326.

38T. Jamasb and M. Pollitt, op. cit.

39P. Aghion et al., op. cit.

40Eurelectric, R&D in EURELECTRIC countries, 2002 update, Research and Development

Working Group, Ref: 2002-520-0013, Brussels, Union of the Electricity Industry, January 2002.

41En 2003, la liberalisation du marche a atteint son regime de croisiere [. . . ]. Nous avons

observe levolution des besoins de nos partenaires, et nous sommes reorganises en consequence.

[. . . ]. Dorenavant, nous en tiendrons compte lorsquil sagira de choisir nos axes de recherche et dedevelopper de nouveaux services. [. . . ]. Notre souci de maximiser la valeur ajoutee pour nos clients

fut lun des moteurs de notre reorganisation interne [. . . , ainsi que] dadapte[r] notre strategie en

consequence et reajuste[r] notre portefeuille de projets de recherche [. . . ]. Dans le contexte

economique actuel, la recherche a long terme est soumise a une pression croissante. Pour linstant,

la plupart des entreprises concentrent leurs efforts sur des projets a court terme, dont le rendement

doit etre evident demblee. [. . . ]. Notre ambition prioritaire est doffrir a nos clients la chane de

valeur la plus complete possible. Rapport dactivite Laborelec (Linkebeek, Belgium: Laborelec

2003), pp. 23.

42J. J. Dooley, op. cit.

43F. 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. 3153.



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45Figure 1 of F. Munari, op. cit.

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

and 48.

47G. Dosi, D. Teece, and S. Winter, Les frontieres des entreprises: vers une theorie de la

coherence de la grande entreprise, Revue dEconomie Industrielle, vol. 51, no. 1 (1990), pp. 238

54.



50B. H. Hall, Z. Griliches, and J. A. Hausman, Patents and R&D: Is There a Lag? In-

ternational Economic Review, vol. 27, no. 2 (1986), pp. 26583, and Z. Griliches, Patent Statisticsas Economic Indicator: A Survey, Journal of Economic Literature, vol. 28, no. 12 (1990),

pp. 1661707.

51R. M. Margolis and D. M. Kammen, op. cit., p. 576.

52The 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 signifi-

cant patents and, thus, more representative of real research activity. Hence, it should be em-

phasized that relying on the USPTO database does not decrease the relevancy of the present

analysis.


54Namely, 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.

55The 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.

56R. 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.


58Indeed, 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 thatthere has been a large decrease in the in-house innovative activity of the firms under consid-

eration, which is our primary interest.



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60F. Munari and R. Oriani, Privatization and Economic Returns to R&D Investments, In-

dustrial and Corporate Change, vol. 14, no. 1, pp. 6191, 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 SSRNhttp://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).

61See, for instance, the case of Laborelec.

62Recall 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.).

63N. Johnstone, I. Hascic, and D. Popp, Renewable Energy Policies and Technological In-

novation: Evidence Based on Patent Counts, Working Paper no. 13760, Cambridge, Massachu-

setts, National Bureau of Economic Research (NBER), 2008.

64J.-M. Martin, Des politiques technologiques mieux adaptees, in Energie et changement

technologiqueUne approche evolutionniste, eds. B. Bourgeois, D. Finon, and J.-M. Martin (Paris:

Economica, 2000), pp. 42344; J. J. Dooley, op. cit.; and F. Munari, op. cit.


66

R. M. Margolis and D. M. Kammen, op. cit.67F. 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.

68Social welfare considers the social impact of the decrease in the number of granted patents due

to the slowdown in private R&D activity.

69J. G. March, Exploration and Exploitation in Organizational Learning, Organization Sci-

ence, vol. 2, no. 1 (1991), pp. 7187.

70A typology of forms of learning is given in F. Malerba, Learning by Firms and In-

cremental Technical Change,Economic Journal, vol. 102, no. 413 (1992), pp. 84559; 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. 15573; 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, inTechnical Change and

Economic Theory, eds. G. Dosi, C. Freeman, R. Nelson, G. Silverberg, and L. Soete (London:

Pinter Publisher, 1988), pp. 22138, 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

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the learning by searching which, by nature, is on the border between continuous change and

paradigmatic ruptures.

71By 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. 14762) because they

integrate the specific knowledge base toward a given technology, G. Dosi, Opportunities, In-

centives and the Collective Patterns of Technological Change, Economic Journal, vol. 107, no.

444 (1997), pp. 153047.

72See G. Dosi, Technological Paradigms and Technological Trajectories and Opportunities,

Incentives and the Collective Patterns of Technological Change.

73The pre-paradigmatic phase (cf. G. Dosi, The Nature of Innovative Process).

74J. S. Metcalfe and M. Boden, Paradigms, Strategies and the Evolutionary Basis of Tech-nological Competition, in New Technologies and the Firm, ed. P. Swann (London: Routledge,

1993), pp. 83102.

75A. D. Sagar and B. van der Zwaan, op. cit.

76G. Dosi, Technological Paradigms and Technological Trajectories, The Nature of In-

novative Process, and Opportunities, Incentives and the Collective Patterns of Technological

Change.


78J. 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. 25680; and R. Nelson and S. G. Winter, op. cit.

79B. J. Loasby, Organisational Capabilities and Interfirm Relations,Metroeconomica, vol. 45,

no. 3 (1994), pp. 24865. This is known as the forget-by-not-doing phenomenon. See, also,

R. Nelson and S. G. Winter, op. cit., p. 64.

80D. Popp, They Dont 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. 75376.

81However, the estimate of this effect is not always significant.

82D. 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. 22543.

83R. A. Bell and T. R. Schneider, Balkanization and the Future of Electricity R&D, Elec-

tricity Journal, vol. 12, no. 6 (1999), pp. 8798. 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.



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84For other power and storage techniques, these mostly consist of electricity distribution and

transmission and transformation of electric power.

85J. Dooley, op. cit.

86The Public Service Obligation also funds R&D projects in the domain of biomass, fuel cells,ocean energy, etc.

87Note that Denmark also has removed nuclear energy from its energy portfolio.

88Eurelectric, op. cit.

89Act 79/1999 of March 16 fixing a 0.05 euro tax for each kilowatt-hour (kWh) consumed.

90The 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.

91J. A. Schumpeter, The Theory of Economic Development: An Inquiry into Profits, Capital,

Credit, Interest, and the Business Cycle (Piscataway, New Jersey: Transaction Publishers,1982),

andCapitalism, Socialism, and Democracy (New York: Harper Perennial Modern Classics, 2008).

92S. 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.

93J. Dooley, op. cit., and R. M. Margolis and D. M. Kammen, op. cit.

94

N. Johnstone et al., op. cit.


96Considering its environmental impact, this is a positive externality from a social point of view.

97D. Popp et al., op. cit.



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