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The Impact of the Regulatory Reform Process on the R&D Investment of European Electricity Utilities

  • Stephan Schmitt EMAIL logo and Denes Kucsera

Abstract

The aim of this paper is to provide deeper insights into the impact of regulatory reforms and privatization on the R&D spending of electricity utilities. Building on a novel panel data set including the biggest European utilities from eight EU countries over a period from 1985 to 2010, we find that the overall influence of the European regulatory reform process on R&D investment is ambiguous. The empirical evidence indicates that the approaching liberalization process, i.e., nearing competition, has a dampening effect on R&D spending. Utilities reduce their expenses due to increased uncertainties and additional risks. However, once the market and regulatory framework conditions have been set up and firms have become used to the new situation, higher levels of competition positively influence R&D and former incumbents invest more in order to “escape” from the competition. Moreover, we find no indication that (ownership) unbundling and incentive regulation directly affect the research expenditures of the utilities. In contrast, the privatization of utilities seems to have strong negative consequences for their amount of R&D spending.

JEL Classification:: L43; L51; L94

Corresponding author: Stephan Schmitt, wik-Consult GmbH, Rhoendorfer Str. 68, 53604 Bad Honnef, Germany, e-mail: ; and Research Institute for Regulatory Economics, Vienna University of Economics and Business, Vienna, Austria

Appendix

Appendix A: Variable Definitions

Variable, AbbreviationVariable DescriptionSource
R&D investment, RDR&D investment of a firm (in thousand euros)Datastream+annual reports
SalesSales of a firm (in thousand euros)Datastream
Free cash flow, cash flowFree cash flow=EBIT*(1–tax rate)+depreciation – change in working capital – CAPEX (in thousand euros)Datastream
LeverageLeverage=long-term debt/total assetsDatastream
Share in hydro power generation, share in hydroShare in hydro power generation=hydro power capacity/total generation capacityPlatts
Share in nuclear power generation, share in nuclearShare in nuclear power generation=nuclear power capacity/total generation capacityPlatts
C1 market concentration index, C1Market share of the biggest generator in a country measured in generation capacityPlatts
Electricity consumption, demandCountry-specific electricity consumption (in GWh)OECD – Elec./Heat Supply and Cons.
Starting point of the regulatory reform process, REGStarting point of the European regulatory reform process is the first internal energy market directive 1996/92/EC, in force since 1997; the UK and CZ differ, see Section 4.2EU directive 1996/92/EC
Firm-specific degree of public ownership, PO50Firm-specific degree of public ownership (0=public ownership below 50%, 1=public ownership above 50%)Annual reports+ Internet search
Public ownership, POOwnership of the largest companies in the generation, transmission, distribution, and supply segments of the electricity industry in a country (0=private, 1=mostly private, 2=mixed, 3=mostly public, 4=public)OECD International Regulation Database
Ownership unbundling, OUOwnership unbundling of the transmission grid in a country (0=no OU, 1=OU)EU documents+national regulatory authorities
Overall degree of vertical separation, OVSOverall degree of vertical separation in a country including transmission and distribution lines (0=OVS is integrated, 1=OVS is mixed, 2=OVS is unbundled)OECD International Regulation Database
Incentive regulation, IRIntroduction of incentive regulation in a country (0=no incentive regulation, 1=incentive regulation)National regulatory authorities+Kucsera and Schmitt (2012)
Liberalized wholesale market, LWMExistence of a liberalized wholesale market for electricity in a country (0=no LWM, 1=LWM)OECD International Regulation Database
Third-party access, TPAThird-party access to the electricity transmission grid in a country (0=no TPA, 1=negotiated TPA, 2=regulated TPA)OECD International Regulation Database
Nearing third-party access, Nearing_TPAYears until TPA starts (0 if neg. or reg. TPA already introduced, 1 if neg. or reg. TPA is introduced in the following year, the same for 2, 3, 4, 5 years, if the introduction of neg. or reg. TPA is in more than 5 years=5)Self-constructed from the OECD International Regulation Database

Appendix B: Descriptive Statistics.

VariableNumber of ObservationsMeanStandard DeviationMin.Max.
RD25669270.17123,091292.526583,000
Sales40713,700,00017,600,000379,28192,900,000
RD/Sales2560.00400.00490.00010.0300
Cash Flow391702,7112,269,110–14,900,00012,400,000
Leverage4080.22990.149600.6050
Share in Hydro3380.23850.192800.8019
Share in Nuclear3380.16830.163900.6022
C14200.35940.23150.15890.9332
Demand500289,010161,83837,771543,248
PO504310.48020.500101
PO5202.08651.463204
OU5200.25190.427801
OVS5201.0250.750902
IR5200.34610.476201
TPA5201.11340.897702
Nearing_TPA5201.37502.055005
LWM5200.48260.500101

The units of the variables correspond to the variable definitions in Appendix A.

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Article note

The authors are grateful for helpful comments from the participants in the EEM 2012 conference in Florence and the EARIE 2012 conference in Rome on former versions of this paper. Furthermore, we want to thank Gert Brunekreeft, Klaus Gugler, and Robert Weaver for their useful comments and most welcome critique. All remaining errors are ours.


Published Online: 2014-7-22
Published in Print: 2014-3-1

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