The Innovation Dimension of Infrastructure Reform: The Case of Electricity Sector

1
The Innovation Dimension of Infrastructure
Reform The Case of Electricity Sector
UNIVERSITY OF
CAMBRIDGE
Department of
Applied Economics

• Tooraj Jamasb
• Michael Pollitt
• http//www.econ.cam.ac.uk/electricity

International Energy Workshop 22-24 June 2004,
Paris
2
Outline

• Status of energy RD spending
• Electricity sector liberalisation
• Review of empirical evidence - industrial
  organisation innovation
• Lessons policy implications

3
Why Concern with Innovation

• Social returns higher than private returns
• Driver for long-term sectoral efficiency
  improvement and economic benefits
• Clean technologies (e.g. pollution reduction,
  climate change)
• Reforms face issues - Can help with market power,
  investments, renewables, DG
• LDCs - 2 bill. people yet to gain access

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Total RD Spending Patents - US
Source Margolis Kammen (2000)
5
Government RD Spending - Top 10
Source IEA
6
Energy RD - US
7
Private Electricity RD - Japan
8
UK Energy Sector RD
Nuclear fission
Fossil fuels
Power and storage
Renewables
Conservation
million (2002 prices)
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
9
Top 700 Private RD Firms (2002)
Source DTI
10
Collaborative Energy RD - EPRI
Source Based on EPRI annual reports
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Electricity Sector Liberalisation
12
Electricity Sector Liberalisation
13
Reform in TOP RD Countries
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Outline of Evidence
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Summary - I

• Public RD spending - decline before after
  reform
• Restructuring - Negative size (vertical
  horizontal) effect and diseconomies of vertical
  separation
• Competition - Negative effect of short-termism
  and uncertainty

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Summary - II

• Privatisation - Negative effect of short-termism
  leverage
• Mergers
• Negative effect of geog. dispersed horizontal
  mergers
• Positive effect of vertical mergers (?)
• Organisational learning capacity - made
  irrelevant or lost in the processes
• Shift of focus - from basic research to
  application and commercialisation

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Summary - III

• Public-private RD complementarity -
  Negative effect
• Internal-external RD complementarity - Negative
  effect
• Internal intra-firm competition for resources -
  Negative effect

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Some Lessons

• Government RD should focus on basic research
• Intervention should promote both internal
  collaborative effort (OFGEM innovation fund vs.
  local programs e.g. state-level public benefit
  RD)
• RD active firms are more efficient - More firms
  (incl. manufacturers) should be able to enter
  and/or be made active

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Contextual Factors

• Technical progress on the margins of the reform
  process - neither a driving force, nor an
  objective
• Positive links between liberalisation and
  innovation are indirect and secondary, and
  therefore uncertain
• Direct intervention must be weighted against
  secondary incentives

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New Questions

• Is the reduction in RD level a one-off (and
  temporary) adjustment to uncertainty? Or, a
  lasting feature of liberalised network
  industries?
• Do we understand the nature of innovation process
  and relative importance of energy companies,
  government, and manufacturers?
• How can we promote innovation in a liberalised
  sector? efficiently?

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Relevance for Learning Curves Energy
Technology Policy
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Technical Progress Learning
Unit cost
Volume effect
c
A
c1
Technology improvement
x
x1
x2
Cumulative capacity / production
Source Based on IEA (2003)
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The Innovation Dimension of Infrastructure
Reform The Case of Electricity Sector
UNIVERSITY OF
CAMBRIDGE
Department of
Applied Economics

• Tooraj Jamasb
• Michael Pollitt
• http//www.econ.cam.ac.uk/electricity

International Energy Workshop 22-24 June 2004,
Paris