The Effects of RDI Regulation on Energy Sector

The paper “The Effects of RDI Regulation on Energy Sector” will be presented at the 10th FSR Annual Conference (10-11 June, 2021).

ABSTRACT:

Introduction

The energy sector is characterized by the close regulation and strong presence of governmental enforcement – laws and norms – since it is a natural monopoly and has a social nature. Nevertheless, during the last 40 years the electricity and gas sectors suffered structural changes because of the deregulation, unbundling and privatization movements that increased the competition in these sectors.

The overarching goal of these movements was increasing the efficiency and productivity in the energy sectors through technological improvements and innovative efforts. The argument was that profit incentivizes investments in research, development, and innovation (RDI) by the energy companies, giving the fact that innovation is the primary source of differentiation between companies in a competitive sector. Nevertheless, the measurement of the effects of the ’80-90’s process of deregulation, unbundling, and rise of competition in the electricity and gas sectors, highlighted that in the long-term it offsets innovation rates. More recently, studies analysing the effect of the deregulation process on patents found that the reduction of entry barriers and the decrease of the regulatory burden negatively affected the patenting activities. Thus, the importance of subsidized R&D was highlighted as a solution to direct technical change in these sectors.

Purpose of the Study

Those results demonstrate the challenges to provide proper incentives for innovation in energy sectors, despite the increasing pressure toward technological change compelled by the decentralization, decarbonisation, and digitalisation trends. Given the lack of coordination among the stakeholders, the regulators are called into action to ensure the efficient performance of the industry, and they created new types of enforcement of the RDI regulations to give incentives towards innovation in the energy industry. Therefore, the purpose of this paper is to study the effects of those enforcements in the electricity and gas sectors innovation outputs.

Research Design

The report “Do current regulatory frameworks in the EU support innovation and security of supply in electricity and gas infrastructure?” (Haffner, Robert et al. 2019) tracked regulatory practices in electricity and gas sectors to foster innovation in European Union (EU) countries. Nevertheless, this phenomenon is not restricted to the EU and includes the United Kingdom (RIIO), United States (New York REV), and even in developing countries such as Brazil (PROP&D).

Despite the existence and growth of the RDI regulations, there is still a lack of evidence concerning its effects in the energy sector. Therefore, our research focuses on verifying the impact of RDI Regulations in the electricity and gas sector in terms of patents.

To perform our analysis, through panel data of 24 EU countries we considered the countries that implemented RDI Regulations in the electricity and gas sector as a basis for a difference-in-difference analysis measured by the number of patents granted. Thus, we differentiated the treatment Group – countries with RDI regulation – and a Control Group – countries without RDI regulation. Additionally, the following variables from the OECD database during the period of 1990-2013 were considered: (a) sectoral regulation; (b) business enterprise R-D personnel; (b) business enterprise R&D expenditure.

Expected Results

The expected results of this empirical research are the analysis of the effect of the RDI regulation on the number of patents, and the description of the relationship between RDI regulation and innovation in the EU countries.

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