Deregulation and R&D in Network Industries: The Case of the Electricity Industry

Implementation of electricity reform has coincided with a significant decline in energy R&D activities. Technical progress is crucial for tackling many energy and environmental issues as well as for long-term efficiency improvement in the sector. This paper reviews the industrial organisation literature on innovation to explore the causes of the decline in energy R&D spending and shows that it was predicted by the pre-reform literature. More recent evidence endorses this conclusion. At the same time, R&D productivity and innovative output appears to have improved in both electric utilities and equipment suppliers, in line with general improvements in the operating efficiency of the sector. Despite this, a lasting decline in basic R&D and innovation input into basic research may negatively affect development of radical technological innovation in the long run. There is a need for reorientation of energy technology policies and spending toward more basic research, engaging more firms in R&D, encouraging collaborative research, and exploring public private partnerships. JEL Classification: L94, O38