Skip to content
Licensed Unlicensed Requires Authentication Published by De Gruyter July 22, 2014

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

  • Stephan Schmitt EMAIL logo and Denes Kucsera


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 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.
Cash Flow391702,7112,269,110–14,900,00012,400,000
Share in Hydro3380.23850.192800.8019
Share in Nuclear3380.16830.163900.6022

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


Advisory Group on Energy. (2005) Key Tasks for Future European Energy R&D. Report for the European Commission.Search in Google Scholar

Aghion, P., P. N. Bloom, R. Blundell and R. Griffith (2005) “Competition and Innovation: An Inverted-U Relationship,” Quarterly Journal of Economics, 120:701–728.Search in Google Scholar

Alesina, A., S. Ardagna, S. Nicoletti and F. Schiantarelli (2005) “Regulation and Investment,” Journal of the European Economic Association, 3(4):791–825.10.1162/1542476054430834Search in Google Scholar

Arocena, P., D. Saal and T. Coelli (2009) Measuring Economies of Horizontal and Vertical Integration in the U.S. Electric Power Industry: How Costly is Unbundling? Working Paper RP 0917, Aston Business School, UK.Search in Google Scholar

Arrow, K. J. (1962) “Economic Welfare and The Allocation of Resources to Invention.” In: (R. R. Nelson, ed.) The Rate and Direction of Economic Activity. New York: Princeton University Press.10.1515/9781400879762-024Search in Google Scholar

Balmert, D. and G. Brunekreeft (2010) “Deep-ISOs and Network Investment,” Competition and Regulation in Network Industries, 11(1):27–49.10.1177/178359171001100102Search in Google Scholar

Blyth, W., R. Bradley, D. Bunn, C. Clarke, T. Wilson and M. Yang (2011) “Investment Risks Under Uncertain Climate Change Policy,” Energy Policy, 35:5766–5773.10.1016/j.enpol.2007.05.030Search in Google Scholar

Bond, S. and J. V. van Reenen (2007) “Microeconometric Models of Investment and Employment.” In: (J. Heckman and E. Leamer, eds.) Handbook of Econometrics. Elsevier, Edition 1, volume 6, 6a, pp. 4417–4498.Search in Google Scholar

Bortolotti, B., C. Cambini, L. Rondi and Y. Spiegel (2011) “Capital Structure and Regulation: Do Ownership and Regulatory Independence Matter?” Journal of Economics and Management Strategy, 20(2):517–564.10.1111/j.1530-9134.2011.00296.xSearch in Google Scholar

Brunekreeft, G. and D. Bauknecht (2009) “Regulierung und Innovationstätigkeit: eine ökonomische Perspektive,” In: (M. Eifert and W. Hoffmann-Riem, eds.) Innovationsfördernde Regulierung. Berlin: Duncker and Humblot, pp. 243–256.Search in Google Scholar

Burger, C. and J. Weinmann (2012) ESMT Innovation Index 2010 – Electricity supply industry. ESMT Business Brief.Search in Google Scholar

Cambini, C. and L. Rondi (2010) “Incentive Regulation and Investment: Evidence from European Energy Utilities,” Journal of Regulatory Economics, 38:1–26.10.1007/s11149-009-9111-6Search in Google Scholar

Cohen, L. R. and P. Sanyal (2004) R&D Choice in Restructured Industries: In-House v/s Collaborative Research in the US Electricity Industry. Working Paper Series, Brandeis University, Waltham.10.2139/ssrn.556645Search in Google Scholar

Defeuilley, C. and A. Furtado (2000) “Impacts de l’ouverture a la concurrence sur la R&D dans le secteur electrique,” Annals of Public and Cooperative Economics, 71(1):5–28.10.1111/1467-8292.00131Search in Google Scholar

Delaney, J. B. and T. C. Honeycutt (1976) “Determinants of Research and Development Activity by Electric Utilities: Comment,” Bell Journal of Economics, 7(2):722–725.10.2307/3003286Search in Google Scholar

Dobbs, I. M. (2004) “Intertemporal Price Cap Regulation Under Uncertainty,” Economic Journal, 114:421–440.10.1111/j.1468-0297.2004.00215.xSearch in Google Scholar

Dooley, J. J. (1998) “Unintended Consequences: Energy R&D in a Deregulated Energy Market,” Energy Policy, 26(7):547–555.10.1016/S0301-4215(97)00166-3Search in Google Scholar

Evans, L. T. and G. A. Guthrie (2005) “Risk, Price Regulation, and Irreversible Investment,” International Journal of Industrial Organization, 23(1–2):109–128.10.1016/j.ijindorg.2004.11.005Search in Google Scholar

Gilbert, R. J. and D. M. Newbery (1982) “Preemptive Patenting and the Persistence of Monopoly,” American Economic Review, 72(3):514–526.Search in Google Scholar

Gugler, K., M. Rammerstorfer and S. Schmitt (2013) “Ownership Unbundling and Investment in Electricity Markets – A Cross Country Study,” Energy Economics, 40:702–713.10.1016/j.eneco.2013.08.022Search in Google Scholar

Hall, B. H. and J. van Reenen (2000) “How Effective are Fiscal Incentives for R&D? A Review of the Evidence,” Research Policy, 29(4–5):449–470.10.1016/S0048-7333(99)00085-2Search in Google Scholar

Helm, D. and D. Thompson (1991) “Privatized Transport Infrastructure and Incentives to Invest,” Journal of Transport Economics and Policy, 15:231–246.Search in Google Scholar

Holmstrom, B. (1989) “Agency Costs and Innovation,” Journal of Economic Behavior and Organization, 12:305–327.10.1016/0167-2681(89)90025-5Search in Google Scholar

Jamasb, T. and M. Pollitt (2008) “Liberalisation and R&D in Network Industries: The Case of The Electricity Industry,” Research Policy, 37:995–1008.10.1016/j.respol.2008.04.010Search in Google Scholar

Jamasb, T. and M. Pollitt (2011) “Electricity Sector Liberalisation and Innovation: An Analysis of The UK Patenting Activities,” Research Policy, 40:309–324.10.1016/j.respol.2010.10.010Search in Google Scholar

Joskow, P. (2002) “Electricity Sector Restructuring and Competition: A Transactions-Cost Perspective,” In: (E. Broussau and J.-M. Glachant, eds.) The Economics of Contracts: Theories and Applications. Cambridge: Cambridge University Press.10.1017/CBO9780511613807.026Search in Google Scholar

Kamien, M. and N. Schwartz (1975) “Market Structure and Innovation: A Survey,” Journal of Economic Literature, 13(1):1–37.Search in Google Scholar

Keller, K. and J. Wild (2004) “Long-term Investment in Electricity: A Trade-off Between Co-Ordination and Competition?,” Utilities Policy, 12:243–251.10.1016/j.jup.2004.03.002Search in Google Scholar

Kim, J., Y. Kim and D. Flacher (2012) “R&D Investment of Electricity-Generating Firms Following Industry Restructuring,” Energy Policy, 48:103–117.10.1016/j.enpol.2012.04.050Search in Google Scholar

Kucsera, D. and S. Schmitt (2012) Monopoly Rights in an Ex-Monopoly Industry: The Impact of the European Electricity Reforms on Electricity-Related Patent Activities. Working Paper, Research Institute for Regulatory Economics, WU Vienna.Search in Google Scholar

Kwoka, J. (2002) “Vertical Economies in Electric Power: Evidence on Integration and Its Alternatives,” International Journal of Industrial Organization, 20(5):653–671.10.1016/S0167-7187(00)00114-4Search in Google Scholar

Laffont, J. and J. Tirole (1993) “Privatization and Incentives.” In: (J. Laffont and J. Tirole, eds.) The Theory of Incentives in Procurement and Regulation. Cambridge, USA: MIT Press.Search in Google Scholar

Mayo, J. W. and J. E. Flynn (1988) “The Effects of Regulation on Research and Development: Theory and Evidence.” Journal of Business, 61(3):321–326.10.1086/296435Search in Google Scholar

Megginson, W. and N. J. Netter (2001) “From State to Market: A Survey of Empirical Studies on Privatization,” Journal of Economic Literature, 39(2):321–389.10.1257/jel.39.2.321Search in Google Scholar

Motta, M. (2004) Competition Policy. New York: Cambridge University Press.10.1017/CBO9780511804038Search in Google Scholar

Munari, F. (2002) “The Effects of Privatization on Corporate R&D Units: Evidence from Italy and France,” R&D Management, 32(3):223–232.10.1111/1467-9310.00255Search in Google Scholar

Munari, F. (2003) “Does Ownership Affect Innovation? Assessing the Impact of Privatisation Processes on Innovation Activities,” European Business Organization Law Review, 4:553–571.10.1017/S1566752903005536Search in Google Scholar

Munari, F. and M. Sobrero (2003) “Privatization’s effects on R&D investments,” In: (M. Calderini, P. Garrone and M. Sobrero, eds.) Corporate Governance, Market Structure and Innovation. London: Edward Elgar.Search in Google Scholar

Munari, F., E. Roberts and M. Sobrero (2002) “Privatization Processes and The Redefinition of Corporate R&D Boundaries,” Research Policy, 31(1):33–55.10.1016/S0048-7333(01)00108-1Search in Google Scholar

Munari, F., R. Oriani and M. Sobrero (2010) “The Effects of Owner Identity and External Governance Systems on R&D Investments: A Study of Western European Firms,” Research Policy, 39:1093–1104.10.1016/j.respol.2010.05.004Search in Google Scholar

Nelson, R. A. (1984) “Regulation, Capital Vintage, and Technical Change in The Electric Utility Industry,” Review of Economics and Statistics, 66(1):59–69.10.2307/1924696Search in Google Scholar

Newbery, D. (2005) “Introduction,” Energy Journal, A Special Issue on European Electricity Liberalization, 1–10.10.5547/ISSN0195-6574-EJ-Vol26-NoSI-1Search in Google Scholar

Niskanen, W. A. (1971) Bureaucracy and Representative Government. Chicago: Aldine-Atherton.Search in Google Scholar

Pollitt, M. (2008) “The Arguments for and Against Ownership Unbundling of Energy Transmission Networks,” Energy Policy, 36(2):704–713.10.1016/j.enpol.2007.10.011Search in Google Scholar

Sanyal, P. (2007) “The Effect of Deregulation On Environmental Research by Electric Utilities,” Journal of Regulatory Economics, 31:335–353.10.1007/s11149-007-9023-2Search in Google Scholar

Sanyal, P. and L. R. Cohen (2009) “Powering Progress: Restructuring, Competition and R&D in the U.S. Electric Utility Industry,” The Energy Journal, 30(2):41–80.10.5547/ISSN0195-6574-EJ-Vol30-No2-3Search in Google Scholar

Sanyal, P. and S. Ghosh (2010) Product Market Competition and Upstream Innovation: Evidence from the US Electricity Market Deregulation. Working paper, Brandeis University.Search in Google Scholar

Sterlacchini, A. (2006) HYPERLINK “ R&D Drop in European Utilities. Should We Care About It? HYPERLINK “” MPRA Paper 31, University of Munich.10.2139/ssrn.930293Search in Google Scholar

Sterlacchini, A. (2012) “Energy R&D in Private and State-owned Utilities: An Analysis of The Major World Electric Companies,” Energy Policy, 41:494–506.10.1016/j.enpol.2011.11.010Search in Google Scholar

Stern, N. (2008) “The Economics of Climate Change,” The American Economic Review, Papers and Proceedings of the One Hundred Twentieth Annual Meeting of the American Economic Association 98(2):1–37.10.1257/aer.98.2.1Search in Google Scholar

Vickers, J. and G. Yarrow (1997) Privatization: An Economic Analysis. Cambridge, Massachusetts: MIT Press.Search in Google Scholar

Von Hirschhausen, C., T. Beckers, and A. Brenck (2004) “Infrastructure Regulation and Investment for The Long-Term – An Introduction,” Utilities Policy, 12:203–210.10.1016/j.jup.2004.09.002Search in Google Scholar

Wilder, R. P. and S. R. Stansell (1974) “Determinants of Research and Development Activity by Electric Utilities,” Bell Journal of Economics and Management Science, 5(2):646–650.10.2307/3003126Search in Google Scholar

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

©2014 by De Gruyter

Downloaded on 7.12.2023 from
Scroll to top button