Innovation in restructured electricity sector: Diagnosis, root causes, method of inquiry

The paper investigates innovativeness of the electricity sector in conjunction with the ongoing liberalization process. Firstly, the paper demonstrate the lack of innovation in today´s partly restructured electricity sector by reviewing existing empirical evidence. To make this point, a case that show how low R&D spending is, compared to other major sectors is provided. Moreover, the societal consequences of lack of innovation is touched upon. Secondly, the paper systematically investigates the root causes of the problem by highlighting the innovation related characteristics of the sector and relating these characteristics to Schumpeterian technology regimes. This contribution builds the bridge between existing theoretical results and the existing empirical evidence. Furthermore, the paper argues that formal models (of a game theoretic character) are needed to better disentangle alternative hypotheses concerning industrial organization and innovation. Such game theoretic models are needed in order to make sense out of messy, conflicting empirical data concerning innovation and performance. A systemic review of these models in the literature is given. An overarching conclusion from these game theoretic reviews is that innovation is not fully compatible with market mechanisms. This is the reason in fact that science funding and innovation policy is shielded from market forces where there is inevitably an underinvestment in research and development. The paper conclude with remarks relating reformed markets to innovations. We conclude that given the scope of needed new innovation, better market designs (or mechanism designs) are needed. These conclusions do not foreclose the necessity of improved energy policies at the national or member state level.