Innovation and Regulation in the Electricity Supply Industry

Regulation is one of the key factors shaping both supply of and demand for new technologies and systems. Consequently, the regulatory framework for utilities can – although primarily focused on the introduction of competition – play an important role for technology and innovation policy. Especially, the diffusion of new renewable technologies hinges upon the creation of an appropriate regulatory framework, which inter alia supports technology policy objectives and strategies. The liberalization of electricity markets has a number of implications for public policy. Early international evidence on the effects of competitive forces suggests that industry performance is improving, utilities have incentives to outsource or reduce R&D activities and some technologies become clear winners under a competitive regime. Recent liberalization experience in the U.K. suggests that wider social and economic objectives can be achieved through appropriate regulatory intervention. New regulatory instruments such as Energy Efficiency Standards of Performance (EESOPs) and the Non-Fossil Fuel Obligation (NFFO) can support environmental and innovation policy objectives. For example, the NFFO is utilized in the U.K. in order to support new renewable energy technologies. The NFFO experience suggests that design and continuous re-design of regulatory tools is necessary. Danish energy policy has been promoting technological and institutional innovations over the last two decades. The most striking results have been achieved in the field of wind power, where Danish companies have gained a substantial share of the world market. An appropriate policy mix towards innovation and diffusion of renewables has to account for the implications of regulation and competition.