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

Abstract 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.