From Regulation to Deregulation: An Empirical Study of Japanese Electric Utility R&D Investment Behavior under Transition

Abstract

The electricity deregulation started from the 1990s has altered the R&D behavior of electricity utilities remarkably. This paper investigates the impact of generation deregulation, retail deregulation, government R&D expenditure and firm size on electric utility R&D investment at the firm level. We try to estimate how incumbent electricity utilities change their R&D strategy to adapt to new challenges during the transition a competition environment. We show for 9 vertically-integrated, regional monopolized utilities in Japan over the period 1978-2014 that under the process the of deregulation and owing to the increasing competition pressure from generation sector and retailing sector, R&D expenditure dramatically declined. Larger utility spends more R&D than small utilities. Government energy sector R&D input is positively correlated with utility R&D expenditure. Also, the breakups of R&D expenditure from 1994 to 2005 imply that the R&D priorities of the electric companies switch to cost-saving and business-oriented projects under the deregulation process. The declining R&D efforts may be detrimental to the reliability and dynamic efficiency of the electricity system especially more renewable energy has been incorporated, as well as the innovation maintenance of introducing smart grid and environmental concerns.