Sustainability Innovations in the Electricity Sector

Sustainability and Innovation Coordinating Editor: Jens Horbach Series Editors: Eberhard Feess Jens Hemmelskamp Joseph...

Author: Dorothea Jansen | Katrin Ostertag | Rainer Walz

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Sustainability and Innovation Coordinating Editor: Jens Horbach

Series Editors: Eberhard Feess Jens Hemmelskamp Joseph Huber Rene´ Kemp Marco Lehmann-Waffenschmidt Arthur P.J. Mol Fred Steward

For further volumes: http://www.springer.com/series/6891

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Dorothea Jansen

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Katrin Ostertag

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Rainer Walz

Editors

Sustainability Innovations in the Electricity Sector

Editors Prof.Dr. Dorothea Jansen German University of Administrative Sciences Chair of Sociology of Organisation Freiherr-vom-Stein-Straße 2 67346 Speyer Germany [email protected]

Dr. Katrin Ostertag PD Dr. Rainer Walz Fraunhofer Institute for Systems and Innovation Research Competence Center Sustainability and Infrastructure Systems Breslauer Str. 48 76139 Karlsruhe Germany [email protected] [email protected]

ISSN 1860-1030 ISBN 978-3-7908-2729-3 e-ISBN 978-3-7908-2730-9 DOI 10.1007/978-3-7908-2730-9 Springer Heidelberg Dordrecht London New York Library of Congress Control Number: 2011937373 # Springer-Verlag Berlin Heidelberg 2012 This work is subject to copyright. All rights are reserved, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilm or in any other way, and storage in data banks. Duplication of this publication or parts thereof is permitted only under the provisions of the German Copyright Law of September 9, 1965, in its current version, and permission for use must always be obtained from Springer. Violations are liable to prosecution under the German Copyright Law. The use of general descriptive names, registered names, trademarks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. Printed on acid-free paper Physica-Verlag is a brand of Springer-Verlag Berlin Heidelberg Springer-Verlag is a part of Springer ScienceþBusiness Media (www.springer.com)

Preface

The prospect of modern societies depends on their ability to deal with the challenge of climate change in the next decades. Technological innovations may help to reduce the output of greenhouse gases. But barriers in the innovation process seem to be a core problem. Thus, a better understanding of the functioning of institutions and mechanisms governing the social and economic structure of the energy sector, its innovation behaviour and the structure and behaviour of energy consumers are at need. In Germany, energy and climate policies are characterized by partly contradictory trends and ambitions. Driven by the integration of the Common Market we witnessed a change away from public monopolies characterized by high supplysecurity standards, high prices coupled with disincentives for energy efficiency (e.g. degressive price policy), and investments into large technologies. The regime now evolves in a new direction towards privatization, legally free market entry, falling prices followed by lower interest in energy efficiency, and growing interest in small scale flexible technologies. These developments also cause changes on the level of actors. In particular, experts and local politicians mostly expected that municipal utilities would not be able to survive under the new regulation regime. Today, by contrast, we can identify at least some of these enterprises among the most important actors in the energy market. Local utilities are also assigned a key role with regard to energy efficiency innovations, due to their closeness to the final energy consumer, and their important role in the supply of combined heat and power. Thus, they appear to be important actors for pursuing the second political ambition, i.e. climate protection, which is marked by a series of laws, such as the law on renewable energies (feed-in regulation) or on combined heat and power and the introduction of the EU Emission Trading Scheme for greenhouse gases. Liberalization puts actors of the energy sector under much stronger market pressure. Several black-outs in energy supply in the US and in Europe make clear that investment into the grid as well as into new technologies may become a problem under cut-throat competition. Whether utilities, energy suppliers and customers will take this road to the bottom or will be able to harness new and more

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climate-friendly technologies (and services) is a central question for a sustainable economy. Against this background, this book focusses on the mechanisms of diffusion of sustainability innovations in the electricity sector, namely renewable energies, combined heat and power (CHP) as well as energy service contracting. The contributions identify national and sector specifics of innovation patterns and mechanisms. Their general approach is centred on institutions, actors or functions within such a system. Market structure and public sector traditions are discussed as well as actors and their interests, strategies and resources. Hence, this book represents the continuation of earlier works published in the series “Sustainability and Innovation” by Praetorius et al. (2009).1 It enriches the analyses presented there by its particular focus on the role of regulation, on municipal utilities as a specific actor group and by integrating an international perspective. Of particular interest is the question of whether the joint effect of EU driven market liberalization and of climate policies will succeed in establishing market forces that will drive actors towards more climate protection oriented energy production. A special focus is on the role of local utilities in the electricity sector as opposed to large transmission net operators or regional net operators. The countries covered in the contributions include Germany (Chaps. 1–7 and 10), Denmark (Chap. 6), the UK (Chaps. 7 and 8), Switzerland (Chap. 9), and the Netherlands (Chap. 10). In some of these countries (esp. Germany and Switzerland) local utilities are important actors in the innovation system, while other innovation systems, e.g. the UK, function without such an actor group. The first two chapters of the book analyse the strategies of German local utilities in the three selected innovation domains (renewable energy, CHP, energy service contracting). A range of determinants are identified, which influence their strategic choices and their success in these innovation domains. Jansen – from the perspective of actor-centred institutionalism – focuses on electricity generation from renewable sources and CHP. The change of an energy system towards sustainable technologies is conceptualized as depending on (1) a change of actors with respect to interests, values and resources depending on organizational and technical structure and knowledge at the micro level, on (2) a change of collaborative behaviour and ownership structure at the meso level of the energy sector, and on (3) a change of institutions such as professional norms and regulation at the macro level. Barnekow and Jansen (Chap. 2) analyse energy service contracting activities of German local utilities with a special emphasis on two selected customer groups, i.e. hospitals and butcheries. Both are known for their CHP potential. The analysis of local utilities and energy service contracting is then broadened to a comparison of different suppliers of this service in the contribution by Ostertag and Hu¨lsmann. Comparative advantages of local utilities relative to important competitors in this

1 Praetorius B, Bauknecht D, Cames M, Fischer C, Pehnt M, Schumacher K, Voß J-P (2009) Innovation for sustainable electricity systems – Exploring the dynamics of energy transitions, sustainability and innovation. Springer, Heidelberg.

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market segment (e.g. specialised contractors) are identified on the basis of hypotheses derived from transaction cost economics using an econometric approach. Governance structures as determinants for strategic choices are also at the center of Chap. 4 (Jansen and Heidler), which looks at the drivers for and effects of shareholding structures among local utilities and transmission net or regional net operators and their influence for strategic choices in general, and for activities in our three selected innovation domains, in particular. A core element of EU climate policy is the EU Emission Trading Scheme EU ETS. Chapters 5 and 6 analyse its impacts on municipal utilities regarding their activities in renewable electricity generation and CHP (Ostertag et al.) or their activities regarding their CO2 performance more broadly (Knoll and Engels). While Chap. 5 looks at German local utilities and the first phase of the EU ETS (2005– 2007), the analyses of Chap. 6 cover the beginning of the second phase from 2008 onwards and include also other industries outside the energy sector and actors from Denmark. The perspective of international comparative analysis is also adopted by Praetorius et al. in Chap. 8. They compare the UK and Germany with respect to “microgeneration” which includes small scale renewable energy plants and CHP plants. The innovation systems in both countries differ strongly with respect to actor structures and also regulation contexts. MacKerron (Chap. 9) gives some reasons for this by explaining the structures of the UK energy system in a historical perspective looking at the developments since World War II. The last two contributions take a more narrow technological focus again and analyse biomass technology in Switzerland (Wirth and Markard, Chap. 9) and in the Netherlands and Germany (Negro and Hekkert, Chap. 10). They both use the “technological innovation system” approach, which is also prominent in Praetorius et al. (Chap. 8). This book is one of the outcomes of the research project “Diffusion of energy efficiency and climate change mitigation innovation in the public and private sector” carried out jointly by the German Research Institute for Public Administration in Speyer (Germany) and the Fraunhofer Institute for Systems and Innovation Research in Karlsruhe (Germany). We gratefully acknowledge the financial support of the VW Foundation for this project. Speyer Karlsruhe

Dorothea Jansen Katrin Ostertag Rainer Walz

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Contents

Local Utilities in the German Electricity Market and Their Role in the Diffusion of Innovations in Energy Efficiency and Climate Change Mitigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Dorothea Jansen Municipal Utilities and the Promotion of Local Energy Efficiency Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Sven Barnekow and Dorothea Jansen Governance Variety in the Energy Service Contracting Market . . . . . . . . . 41 Katrin Ostertag and Friederike Hu¨lsmann Shareholding and Cooperation Among Local Utilities: Driving Factors and Effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Dorothea Jansen and Richard Heidler Local Utilities Under the EU Emission Trading Scheme: Innovation Impacts on Electricity Generation Portfolios . . . . . . . . . . . . . . . . . . 83 Katrin Ostertag, Nele Glienke, Karoline Rogge, Dorothea Jansen, Ulrike Stoll, and Sven Barnekow Exploring the Linkages Between Carbon Markets and Sustainable Innovations in the Energy Sector: Lessons from the EU Emissions Trading Scheme . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 Lisa Knoll and Anita Engels Microgeneration in the UK and Germany from a Technological Innovation Systems Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . 117 Barbara Praetorius, Mari Martiskainen, Raphael Sauter, and Jim Watson

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Innovation and Diffusion of Renewables and CHP in the UK: Regulation and Liberalisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141 Gordon MacKerron The Context of Innovation: How Established Actors Affect the Prospects of Bio-SNG Technology in Switzerland . . . . . . . . . . . . . . . . . . . . 151 Steffen Wirth and Jochen Markard Identifying Typical (Dys-) Functional Interaction Patterns in the Dutch Biomass Innovation System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175 Simona O. Negro and Marko P. Hekkert

Local Utilities in the German Electricity Market and Their Role in the Diffusion of Innovations in Energy Efficiency and Climate Change Mitigation Dorothea Jansen

1 Introduction and Research Questions The German electricity market has undergone a large restructuring since the beginning of the 1990s. While the number of transmission network operators and regional operators decreased drastically, the number of local utilities has stayed rather stable. New actors entered the market in generation, services and distribution (e.g. Yellow Strom, “e wie einfach” (E.ON), independent power producers, energy counsels). Increasingly, local utilities today engage in joint companies and horizontal collaboration to arrange for knowledge and technology transfer in electricity generation, in joint portfolio management and energy trade, and in joint companies for grid management (ATKearny 2007b; VDEW 2007; BDEW 2009; ZFK 1/2011, 10th of January). The engagement of local utilities may help to counterbalance the dominance of the market by the oligopolies of the four large national suppliers. Building on their close relation with customers, established knowledge in Combined Heat and Power Generation (CHP), they might enter into new business fields such as service innovations and electricity generation. They might even have the potential to trigger a change of the sector towards distributed generation of electricity and climate friendly technologies (c.f. a recent overview Bontrup and Marquardt 2010: pp. 84–92 and Chaps. 4 and 5; and Leprich 2005). In my paper I will focus on the role of municipal utilities and their options in a liberalised energy market. I will deal with four central questions: How did the changes in the institutional set-up of the German energy market affect the self concepts of local utilities? Will they be driven towards strictly economic cost minimising behaviour or will they take on a role in furthering energy efficiency innovations and green generation technologies?

D. Jansen (*) German University of Administrative Sciences and German Research Institute for Public Administration, Freiherr-vom-Stein-Strabe 2, 67346, Speyer, Germany D. Jansen et al. (eds.), Sustainability Innovations in the Electricity Sector, Sustainability and Innovation, DOI 10.1007/978-3-7908-2730-9_1, # Springer-Verlag Berlin Heidelberg 2012

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How does complementary environmental regulation such as feed-in tariffs for renewable energy sources (RES) affect the strategies and behaviour of local utilities? Is it possible to create market niches for energy efficiency innovations that are attractive for local utilities? What factors help or hinder local utilities from engaging in new business fields? In particular, what factors promote the adoption of energy efficiency innovations in energy generation, particularly in RES and CHP? How do horizontal and vertical cooperation as well as private shareholding affect the potential of local utilities to promote the diffusion of energy efficiency innovations and green generation technologies? In Sect. 2 I will introduce the changes in the institutional set-up of the German energy sector and have a look at recent trends of market liberalisation and their outcomes with a special focus on the local level. Sect. 3 presents a review of recent studies on the effects of liberalisation on local utilities and their role in service innovations and the diffusion of green generation technologies. Open questions and several hypotheses for the further analysis are deduced. Sect. 4 introduces the design of this study and the data. Concepts and variables used in the following analysis and their measurement are described. Sect. 5 focuses on the issues of the change of actors, their interests, values and resources and looks at the effects of liberalisation and environmental regulation. Sect. 6 presents the results of the analysis of the factors that impede or drive the engagement of local utilities in traditional and green generation technologies. Sect. 7 concludes.

2 Liberalisation and Re-regulation of the German Electricity Market The German electricity market has undergone a large restructuring since the beginning of the 1990s. The liberalisation resulted into a process of mergers and acquisitions that led to an even higher market power of the large national suppliers (c.f. Bontrup and Marquardt 2010: pp. 77–84). The number of transmission network operators decreased from 9 to 4. Many regional distributors were integrated into the large suppliers (Schiffer 1991: p. 127; 2005: pp. 179; 183; 2008: pp. 210, 238). The sales volume of the four national oligopolies raised from 394.4 TWh in 1996 resp. 1999 (for E.ON) to 1212.6 TWh in 2008 (Bontrup and Marquardt 2010: p. 79). Transmission Network Operators (TNOs) commanded around 82% of generation capacity in 2002 (Schiffer 2002: p. 168) with 11% allotted to local utilities and 7% to regional distributors then. The generation capacity of local utilities decreased in the first phase of energy market liberalisation. The percentage of in-house generation (mostly CHP-plants) decreased from 28.8% in 1998 to 16.7% in 2003 (ATKearney 2005: p. 4). Out of installed generation capacity (127 GW, 2003), 8%

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Fig. 1 Structure of the German electricity distribution system 2007 (Schiffer 2008, 210)

were owned by local utilities, 69% by large vertically integrated TNOs including their consolidated subsidiaries, and 1% by independent regional distributors.1 Following the second EU speed up directive (2003) German energy market regulation was amended again in 2005, in order to put more pressure on the enforcement of open markets. Unbundling was intensified for large grid operators (>100,000 customers) to include legal and operational unbundling of grid management and upstream and downstream business fields. Third-party access to the grid changed from negotiated access to ex ante control by a newly established agency, the Federal Networks Agency (Bundesnetzagentur). This agency and state regulation agencies of the “L€ander” (for utilities with <100,000 customers) had to approve of net tariffs charged to competitors as well as to end-customers ex ante in a first regulation period still on a cost plus basis. Net fees of local utilities under the cost based regime were cut on average by 16.14%. They ranged from 5.31% to 47.82% for instance in Rhineland-Palatinate. In a second stage, according to the second amendment of the energy act, a revenue cap regulation starting in January 2009 was implemented. According to the edict on the new regime (ARegV 2007, amended in 2008 and 2010), within twentyfive-year periods all utilities are supposed to reach the efficiency level of the best competitor in their benchmarking group. The degree of efficiency of local utilities declared by the Rhineland-Palatine regulation agency ranged from 87.5% for the small utilities that chose the de minimis option to 91.2% resp. 100% for two larger municipal utilities.2 In order to avoid a race to the bottom in network quality and investments, the federal network agency is entitled to monitor network quality. Evaluation of network stability and capacity are considered by bonuses and deductions in the revenue cap. In addition, a lump sum for investment is granted in the revenue cap. In case of significant enlargement of the grid the operator may ask for an upgrading. Small utilities (<30,000 electricity

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Further capacities are held by the German railways (1%), industry (8%) and private producers (13%) (ATKearney 2005, 4). 2 www.mwvlw.rlp.de ! Wirtschaft ! Landesregulierungsbeh€orde Energie ! Netzentgelte/ Anreizregulierung.

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customers) were allowed to choose a simplified procedure granting them an efficiency level of 87.5% for the first 5-year period without further inspection. Efficiency levels declared by the Federal Network Agency in 2009 ranged from 90% to 100% for the TNOs and from 82.7% to 100% for the regional network operators and the larger local operators.3 The regulatory efforts are planned to be reduced to a simple yardstick model at the end of the second regulation period. Market-making regulation from the beginning of liberalisation of energy markets has been complemented by market-correcting regulation, in particular environmental regulation in Germany (He´ritier 2001). Local utilities may profit from environmental regulation such as the CHP act (KWKG) of 2002 and the RES act of 2002. Both established long-term feed-in bonus for electricity from cogeneration respective RES and gave electricity from cogeneration resp. RES priority access to the grid. Network operators are held by the law to enlarge and optimise their networks according to the state of technology. The 2008 amendment of the CHP act introduced the goal of striving for a share of 25% of electricity from cogeneration by 2020. Regressive feed-in bonuses according to size and effectiveness of technology for 6 years and the starting year were established. Parallel to the amendment of the CHP act, a new additional heat act was established. It stipulates that by 2020 14% of heat must come from renewable sources. In newly constructed buildings RES for heating have to be installed or compensating measures have to be taken. Financial support for the use of cogeneration energy for heating was increased to as much as 500 Mio € per year for the period 2009–2012. By the 2009 amendment of the CHP act, the application of the act was prolonged beyond 2010 and the total budget was increased up to 750 Mio. € per year. This includes up to 150 Mio € available for the installation of heat pipelines. After the 2009 elections, the new CDU/FDP coalition slowed down pace of climate mitigation goals to a share of 25% electricity from co-generation by 2030. The RES Act (2000, amended in 2004, 2008 and 2010) established regressive feed-in tariffs above the market prices for 20 years. The amendment of 2008 strives to increase the percentage of electricity from RES from 15% in 2008 to at least 30% in 2020. Feed-in tariffs for plants initiated after 2009 are decreased by a fixed percentage. Subsidies for photovoltaic were reduced while incentives for the use of biomass, particularly bio waste, as well as wind energy, particularly repowering, were increased. Electricity from RES (under the EEG) and from CHP (under the KWKG) is exempted from the high voltage part of the grid charges. Thus niches for energy efficiency technologies and RES were created. However, the percentage of RES-subsidies in electricity costs increased strongly with the installation of more and more RES plants. The new government also questions the legitimation for further subsidies in established RES technologies. Thus, the Federal Antitrust Agency recently invited the government to abolish the art. 36 of the RES act which exempts local utilities with more than 50% RES energy sales from paying

Cf. http://www.bundesnetzagentur.de ! Beschlusskammern ! Beschlusskammer 8 ! Ver€offentlichung von Effizienzwerten gem. } 31 ARegV).

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net fees to the network operator. In addition, the agency asks for options and incentives for direct marketing of RES energy, either by an optimisation of the amount of physical transport of energy by establishing IT based exchanges among the network operators of the different regions, or by offering a bonus for direct marketing which could be attractive for producers with low feed-in tariffs (Bundeskartellamt 2011: pp. 294–295). Both concepts were mentioned in the recent energy policy paper (Bundestagsdrucksache 17/34049, 2010). In addition, the newly elected government, under the influence of intensive lobbying of the four large energy suppliers, abrogated the so called nuclear energy consent that limited the life-span of nuclear plants. Thereby plans of local utilities and utility consortia to invest in new RES or CHP power plants became much more risky if not obsolete.

3 New Business Strategies and Effects on Service Innovations and Green Technologies – State of Affairs, Theory Model and Hypotheses 3.1

Incentive Structure and Responses of Local Utilities

Innovations in energy efficiency and green technologies may help to reduce greenhouse gases. However, barriers to the diffusion of available technologies seem to be a key problem. Local utilities are assigned a major role in energy efficiency innovation due to their closeness to the end-customer and their established knowledge and infrastructure in CHP. Contrary to expectations of experts (Eickhoff and Kreikenbaum 1997: p. 270; Leonhardt 2000), they were able to survive market liberalisation despite increased competition by building on customer relations, multi-utility and the control of the “last mile” (Forthmann and Czotscher 2002: p. 9). Public utilities were freed from established links to specific suppliers. Most local utilities have become more autonomous in relation to their traditional principals, the municipalities, too, as they no longer are included into the municipal administration but organised in private legal forms (Edeling 2006). The search for market niches may lead them to offering value-added services profiting from their local reputation and knowledge of customer profiles (c.f. Barnekow and Jansen Chap. 2 in this volume). Small technologies such as wind energy or biomass micro cogeneration are gaining in attractiveness under high market uncertainty. In addition, local utilities may well profit from the niches established by the market-correcting regulatory framework since they comand established knowledge in CHP and heat grids. Since 2000 they also profit from the RES act, as their plants became eligible for feed-in tariffs, too. But, they are also under strong pressures from regulation and markets. Unbundling regulation forces them to reorganise their business. In 2007 and 2008, cost regulation reduced network fees considerably. Under revenue-cap regulation most local utilities providing distribution networks chose the simplified procedure whereby providers with less than 30,000 customers were allowed

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to opt out of the measurement procedures. Instead they have to further increase their efficiency by 12.5% by the end of 2013. For local utilities above 100,000 customers the explicit measurement procedures are mandatory. Efficiency demands of up to 17.3% % until 2013 have been put on large utilities running regional networks crossing the federals states borders by the Federal Network Agency.4 To make a profit, local utilities need to build up new market-oriented business upstreams (generation, energy trade) and downstreams (distribution, services, contracting). New regulatory duties such as smart metering and the tightening of emission trade regimes for the rest of the first trade period (2010–2012) and the looming auction model in the second period of the European Emission Trading System (applies to installations exceeding 20 MWth) have to be dealt with in a cost-efficient way. Coping with liberalisation, local utilities increasingly take up their new market opportunities. While in-house-generation lost in relevance in the beginning of liberalisation, in 2005 seven of eight power plants under construction were new CHP plants of municipal utilities or joint ventures with an overall capacity of 1,822 MW (ATKearny 2005: p. 13). Large local utilities increasingly invested in larger CHP plants and joint generation facilities, they outsourced portfolio management and energy trade to shared services and established specialized units for small scale cogeneration and contracting. Regional discrepancies between the location of generation capacities and the demand will increase further. These competitive pressures may result in a stronger focus on generation as a business field as it is confirmed by recent studies (ATKearny 2007b; Ernest and Young 2008; PWC 2008). In addition, horizontal cooperation among utilities and vertical cooperation are increasingly considered (75–80%) and indeed established (c.f. Jansen and Heidler Chap. 4 in this volume). Lateral and regional collaborations clearly figure first in the perspective of local utilities. Large generation projects are increasingly taken up by joint ventures of large local utilities in collaboration with independent generation companies such as Trianel or S€udweststrom, while CHP plants and RES profit from the exchange of information and the knowledge transfer in more or less formal collaboration networks. The investment in new generation capacities has risen again up to 2.7 bn. € in 2007 after having dropped by 75% to 0.6 bn. € in 2000 (ATKearny 2007a: p. 21; BDEW 2008). Local utilities have a growing share in plants under construction or in programme, particularly with respect to CHP plants (app. 1,955 MW under construction, 4,029 MW in the application process, and further 3,435 MW under planning to be initiated by 2014, BDEW 2009).

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The efficiency values within the 102 cases under regulation of the Federal Network agency range from 82.7% to 100%. 32 utilities achieved 100%, 26 were below 90%. The Federal Network Agency also undertook the legal procedures for large utilties on behalf of five federal states. Out of 17 local utilities five achieved an efficiency level of 100%, eight were below 90%, and one achieved only 75.5%. The energy regulation authority in North-Rhine Westfalia assessed 90 large utilities. These achieved efficiency values ranging from appr. 80% to 100%. Five utilities achieved 100%, 12 were below 90%.

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Theory Model and Hypotheses

To explain the potential of local utilities to engage in energy efficient/ green generation technologies I build on theoretical concepts from actor centred institutionalism (Mayntz and Scharpf 1995) and economic and sociological neoinstitutionalism (Williamson 1975, 1993; DiMaggio and Powell 1991; Senge and Hellmann 2006). These concepts are combined with approaches from network analysis and economic sociology (Powell 1996; Swedberg 2003; Podolny 2005; Jansen 2005; Krippner and Alvarez 2007) and theories of learning and innovation (Nelson and Winter 1982; Lundvall 2002; Carlsson et al. 2002; Siggelkow and Levinthal 2003). I conceptualize the change of an energy system towards sustainable technologies as a micro-meso-macro model (Coleman 1990; Hedstr€om and Swedberg 1998), depending on (1) a change of actors (micro) with respect to interests, values, and resources and a change of organisational and technical structures (2) a change of the interorganisational collaboration and of the ownership structure of the sector (meso-level), and (3) on a change of institutions such as social norms and regulatory approaches (macro). The focus is on the diffusion of technical or social innovations into practice. Slack resources and organisational learning chances such as professionalization of market research or the establishment of information exchange resp collaborative alliances for knowledge transfer depend on resource level and size (Jansen 1996; Cohen and Levinthal 1990). Diffusion often is driven by recipes of “rational practices” spread in organisational fields by mimicry or by professional consultants (Meyer and Rowan 1991). These practices may enjoy a high level of legitimacy. They also can be enforced by institutions in the organisational field such as management consultants, rankings and ratings and regulation. In addition they diffuse by mimicry, since actors under conditions of uncertainty tend to copy other organisations following seemingly legitimate and rational business models (DiMaggio and Powell 1991). How and why these myths and practices change has until now rarely been a topic of neo-institutionalism (Mizruchi and Fein 1999). Most studies focussed on cognitive co-orientation only. Studies that search for the mechanisms of change mostly find interests and power to be important factors, too (Oliver 1992; Quack 2006; Schneiberg and Clemens 2006). From a social network perspective several scholars pointed at the role of networks for the diffusion and adoption of innovations in time, space and degree of penetration. Thus, economic, structural and cultural factors and mechanisms shape the diffusion of knowledge, practices and technologies (Strang and Soule 1998; Borgatti and Cross 2003; Powell et al. 2005; Podolny 2005). Taking into account the mechanisms and factors discussed above I expect regulatory and professional norms established at the macro level to have an impact on the change of routines and actor values at the national and sectoral level of innovation systems (Lundvall 2002; Edquist 1997; Malerba 2002, Carlsson et al. 2002). At the sector level the concept of “New Public Management” (Pollitt and Bouckaert 2004), originally aiming at the reform of public administration, was combined with market-making regulation and liberalisation (He´ritier 2001) driven by EU legislation. Both aimed at an increased efficiency of the public infrastructure

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sector. Besides a change of legal forms, public infrastructure services were now understood as organisations to be managed much like private sector organisations (Edeling et al. 2004). In addition, the market-correcting regulation described above sets incentives for carbon abatement and energy efficiency in particular for RES and CHP by providing a temporary niche market (Negro and Hekkert 2008; He´ritier 2001; Kemp et al. 1998). These norms and incentives may also become part of the interests and values of local utilities, which traditionally adhere to the idea of “Daseinsvorsorge” (Edeling 2006).5

3.2.1

Effects of Macro Level Institutional Changes

As an effect of institutional factors, I expect a change of self concepts. Local utilities will increasingly describe themselves as market actors with a high customer orientation and to some degree also change their operations to build up new services und business fields. Next to private also municipal shareholders as well as regulatory pressure from net efficiency levels will drive them toward increasing their efficiency in open markets. Municipal utilities are thereby challenged to become more efficient and at the same time to provide sustainable services in the public interest. Hypothesis 1a thus stipulates that in the course of liberalisation local utilities increasingly conceive of themselves as market actors. Hypothesis 1b postulates that some of them will deal with the pressure from competitive markets by window dressing and decoupling of talk and action, some will also change their operations to enter new fields and address new customers. Hypothesis 1c stipulates that CHP and RES feed-in bonuses are important factors in the decision making of utilities engaged in CHP and RES. Thus, environmental regulation is postulated to be able to create market niches for carbon abatement technologies successfully and to promote and legitimize ecologic engagement of utilities. Hypothesis 1d finally stipulates that the potential trade-off between economic efficiency and sustainable energy generation may be overcome. Thus, we expect that a high market orientation and striving for increased efficiency does not harm the engagement of local utilities in RES and CHP, under conditions of long-term incentives from environmental regulation.

3.2.2

Effects of Actor Attributes at the Micro Level

At the micro level of organisation and technologies in use, electricity generation and new services constitute important business fields that local utilities may develop to survive in competitive markets. Before market liberalisation, most of

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The EU translation is “services in the general interest”. Albeit this term does not meet the meaning of the German term well. The French term “service public” better catches the meaning of providing goods for the basic infrastructural needs of a local population in an inclusive way.

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them were active only in network operations and distribution which are now either regulated or under fierce competition. Upstream fields (generation) or downstream fields (value-added services, contracting) today have to be developed to generate profits. These fields are interdependent. E.g. large CHP plants can only be operated efficiently if long-term agreements can be concluded securing heat sinks from large customers such as housing districts or municipal facilities. Positive effects on micro CHP addressing private customers are to be expected for the same reasons by strong customer orientation, innovations in distribution, and contracting. In addition, the resource level is an important factor determining innovation. Any innovation will need some slack resources (Cohen and Levinthal 1990). Larger utilities may profit from economies of scale and scope (multi-utility, synergies among business fields) when engaging in new generation technologies. Particularly small utilities may be anxious to take the risks of investing into new technologies in open markets (Monstadt and Naumann 2005). The larger the organisation the easier it will be to build-up new knowledge, to find investors or to establish networks for knowledge transfer or joint ventures (Malerba 2002; Powell et al. 2005; Podolny 2005). Hypothesis 2a expects a positive effect of strong market and customer orientation and innovations in distribution on engagement in generation in general. Hypothesis 2b postulates that an orientation towards traditional local values and to the local demarcated area may further an engagement in large CHP. Hypothesis 2c states positive synergies among generation technologies in general because of knowledge spill-over effects. In particular small scale customer-oriented technologies such as RES and micro CHP should profit from parallel activities as well as from engagement in contracting. Hypothesis 2d expects a positive effect of size on all forms of generation, particularly on large technologies.

3.2.3

Effects of Interorganisational Collaboration and Sector Structure at the Meso Level

As is shown in Jansen and Heidler (Chap. 4 in this volume) there are strong influences of the sector structure on the strategies and behaviour of local utilities. With respect of energy generation strategies I expect a negative effect on engagement in generation by private ownership, mostly of regional and national suppliers, and of vertical cooperation with TNO and their subsidiaries. Electricity generation by local utilities, particularly in (expensive) RES, may be seen as undue competition or as wasting shareholders’ money. Next, the technological distance of technologies in use is large between TNOs/RNOs and local utilities. Thus, knowledge transfer will meet a lot of obstacles. The differences between local utilities and RNOs and TNOs in routines and technologies as well as in values and perceived roles and tasks are large. Thus it will be difficult to build on joint understandings that are essential for the establishment of trust in collaborations. Thus cooperation and shareholding by TNOs and their subsidiaries will suffer from high transaction costs and misunderstandings (Wald and Jansen 2007; Owen-Smith and Powell

10

D. Jansen

2004; Borgatti and Cross 2003; Hansen 2002). For the same reason a positive effect of horizontal collaboration among local utilities on engagement in generation and particularly on engagement in innovative technologies and business fields is expected. Informal horizontal collaboration and more formal collaboration with several utilities at a peer level may help smaller utilities to pool resources and generate economies of scale as well as facilitate knowledge transfer. Hypothesis 3a postulates that private shareholding and vertical cooperation with RNOs and TNOs reduces the probability of local utilities to be engaged in energy generation, the more so the larger the difference between technologies used. Hypothesis 3b, building on data from the expert interviews, expects that smart shareholders and collaborating suppliers may be interested in collaboration with large utilities and/or in financing more profitable business such as fossil-fuel-based large generation or CHP. Hypothesis 3c stipulates that horizontal collaboration with other local utilities strengthens the engagement of local utilities in generation. In particular collaboration in generation will increase the probability of local utilities being engaged in new innovative generation technologies (RES, micro CHP).

4 Design of the Study, Data and Measurement of Concepts Data were collected in a questionnaire study of all local utilities in Germany which are active in electricity distribution. The mailed questionnaire was sent out to 628 utilities in spring 2006, (response rate 21%, n ¼ 135). Larger municipal utilities (100,000 inhabitants) are overrepresented (22% compared to 12%). Small utilities (<25,000 inhabitants) are underrepresented respectively (36% compared to 50% in the population). Utilities which are members of an association for energy efficiency tended to answer more often (37% compared to 28%). Those with private investors are slightly overrepresented (43% compared to 40%). Descriptive data such as means and percentages thus have to be interpreted with care, while causal relationships still can be identified validly provided that variables represent the range of variation in the data validly. Structural data on the size of local utilities and ownership were extracted from a business databank (MARKUS DVD 2007). The change of interest, values and self concepts of local utilities and the degree of their engagement in new business fields such as RES, micro CHP compared to traditional large CHP and fossile fuel based technologies constitute the dependent variables of this study. A factor analysis of a battery of 11 generation technologies (“no engagement” versus “engagement”) resulted in 3 factors explaining 49.3% of the total variance: (1) RES covered by the RES Act except water and micro biomass/-gas CHP (<50MWel), (2) Traditional technologies including fossil fuels, RES not covered by the RES act and water power covered by the RES Act,

Local Utilities in the German Electricity Market and Their Role in the Diffusion

11

(3 and 4) A CHP factor characterised on the positive axis by fossil or RES-based micro CHP (3) and on the negative axis by traditional large CHP (50 MWel) (4). The degree of engagement in each technology factor was measured by the number of technologies that utilities were engaged in. As dependent variables these count variables were split into “high engagement” versus “low engagement” approximately at the median. The large CHP factor is characterised by one technology only. Contracting as a complementary business field was measured by “engagement in contracting” (no/yes). Independent variables were measured as follows: The measurement of self concept is based on a factor analysis of a six item battery on values and strategies. Environmental orientation, readiness for taking higher risks, high relevance of municipal leadership and orientation towards the municipal region loaded high on factor 1 (26.596% of variance), operationalised here by high municipal orientation. This factor is understood as measuring the orientation to towards environmental values and the municipality. A strong focus on customer orientation and the adoption of private management practices characterises factor 2 (21.819% of variance). In addition there is a positive load for environmental issues. The factor is best represented by strong commitment to the customer. This factor is understood as measuring the degree of market orientation of local utilities. There is no evidence for a trade off in environmentalism, but a negative loading for municipal leadership which shows some evidence for hypotheses 2d. Responsiveness to environmental regulation of feed-in tariffs was measured by two item batteries on factors influencing CHP and RES engagement. The effects of liberalisation were measured by an item battery of potential reactions and strategies in downstream or upstream business fields such as an increase in services offered to customers or the entering of the market for balancing electricity. Synergies to other technologies and business areas were measured by a correlation analysis. Variables introduced were engagement in contracting (yes/no) and the count variables measuring the number of different technologies used in the four profiles. Whether an increased market orientation (talk) actually leads to a change in operations (action), is tested by its effect on engagement in distribution beyond the old supply area. Economic performance is measured by the development of electricity sales since liberalisation. Size of utility (quasi-metric measurement in four categories) and ownership data (private investors versus municipally owned) were extracted from the MARKUS database. They constitute a sort of control block for level and type of resources in the regression models. Interests and values of actors were measured by the indicators for market orientation (strong customer orientation), for the traditional commitment to the municipality, and by the commitment to climate change abatement (“very low” to “very high”). The implementation of market orientation was measured by an increase of sales beyond the old supply area (yes) and a more than average percentage of industry/trade customers (yes). Implementation of climate change abatement was measured by the number of activities in energy efficiency/ green technology promotion (0–5). Finally, the collaboration variables were

12

D. Jansen

measured by an item battery asking for the collaboration (no, yes) with a variety of potential partners (TNOs, RNOs, individual other local utilities on an informal base, formalized cooperation with several other local utilities) in the fields of generation, grid management and distribution.

5 Becoming a Market Actor – at the Cost of Environmental Interests? Eighty-six percent of local utilities covered by the MARKUS database are formally constituted in private legal form. Eighty-three percent of the response group in the questionnaire study conceived of themselves as an actor in a competitive market operating a customer oriented business today (H1a). Thus we find evidence for a significant change in the self-understanding of local utilities without sacrificing environmental values. This indicates that market-making and market-correcting regulation may complement each other successfully and offer actors at the micro level the chance to combine market performance and sustainability (He´ritier 2001). The increased priority for customer orientation is not just a lip service as is shown by Figs. 2 and 3. The engagement in additional services for household and business customers clearly rose after the liberalisation (Cramer’s V ¼ 0.374). 70% 60%

59%

61%

50% 40% 30% 20%

17%

17%

19%

18%

10% 0%

5%

3% none

low

mediate

high

before market liberalization after market liberalization

Fig. 2 Engagement in additional services for household and business customers before and after market liberalisation in % (n ¼ 124)

Local Utilities in the German Electricity Market and Their Role in the Diffusion

13

70% 60%

59%

50% 40% 30%

37%

32% 27% 23%

20%

13%

10%

8% 2%

0% none

low

mediate

high

before market liberalization after market liberalization

Fig. 3 Engagement in market of balancing energy before and after market liberalisation in % (n ¼ 124)

The response to market liberalisation is even stronger for the engagement in the upstream market for balancing energy (Fig. 3). 38 local utilities increased their engagement from none or a low to a mediate or high level of engagement. None reduced its engagement (Cramer’s V ¼ 0.4841). Thus, hypothesis 1b expecting an effect of liberalisation not only on attitudes but also on the engagement in new services and business fields can be confirmed. A high customer orientation has a significant positive effect (Phi ¼ 0.218, p ¼ 0.015, n ¼ 124) on selling electricity beyond the demarcated supply area. Figure 4 shows that those who took the chances of an open market fared better than those who did not. The sales of the latter increased by 66% compared to 45%. Thus, there is additional evidence for hypothesis 1a. Feed-in tariffs granting guaranteed long-term prices for electricity from RES and CHP are considered important or very important by more than three quarters of respondents engaged in these technologies. While other factors such as synergy to other technological know-how or customer relationship were slightly more important for engagement in established CHP (feed-in tariffs with 76% ranking third, n ¼ 71), for RES with a less clear future the feed-in tariffs were of highest importance (87%, n ¼ 57). Thus there is evidence for hypothesis 1c. Environmental engagement of local utilities can be effectively buffered against market shocks and competitive pressure by environmental regulation creating niches for specific technologies.

14

D. Jansen 100%

75%

66%

57% 45%

50% 32%

26% 25%

23%

17%

21% 13%

0% All

Distribution within old market region only Decreased

Constant

Distribution beyond old market region Increased

Fig. 4 Sales trend depending on selling beyond the old supply area (n ¼ 123)

6 Effects on the Adoption and Diffusion of Energy Efficiency Innovations and Distributed Generation Local utilities very much build on multi-utility and customer knowledge. Thus, synergies between business fields and the various technologies in use are to be expected. As Table 1 shows, there are strong interdependencies among the technologies and business fields that local utilities are engaged in. As expected in hypothesis 2c, the correlation between the two most innovative small-scale technologies, RES and micro CHP, is highest (r ¼ 0.625) and strongly significant. Engagement in large CHP and in RES is positively interrelated, too, but on a much lower level (r ¼ 0.321). Unlike RES, engagement in large CHP technology does not show strong synergies, neither to large generation technologies based on fossil fuels or water power nor to small CHP and contracting. Both effects are probably due to competition for the same customers. In the case of small-scale CHP and contracting there may be competition for potential heat sinks, too. Sunk costs of established generation technologies partly explain the lower degree of engagement in other technologies. Only 20.2% (n ¼ 109) of local utilities are active in at least one of the old large technologies, 16.5% in two or more. 30.3% (n ¼ 109) of local utilities are active in micro CHP, very few (2.8%) in more than one technology. Fossil fuel based micro CHP still dominates (44 compared to 20 cases). This compares to a much higher diffusion of large CHP (88%, n ¼ 100) and RES (53.3%, n ¼ 135). 36.3% are even engaged in at least two different RES technologies. Both technologies can contribute to a distributed generation system and fit well to the local engagement of municipal utilities. Heat sinks for CHP plants have been and

Local Utilities in the German Electricity Market and Their Role in the Diffusion

15

Table 1 Interdependencies between engagement in various business and technological fields (Pearson correlation and significance level) Large Large and/or Renewables Micro CHP old technologies under RES Act CHP Contracting Large CHP 1 n ¼ 100 Large and/or old technologies

0.014 N ¼ 98

1 N ¼ 109-

Renewables under RES Act

0.141 N ¼ 99

0.321**** N ¼ 109

1 N ¼ 135

Micro CHP

0.098 N ¼ 99

0.178* N ¼ 109

0.625*** N ¼ 109

0.002 0.017 0.330**** N ¼ 98 N ¼ 103 N ¼ 107 *p ¼ <0.10; **p ¼ <0.05; ***p ¼ <0.01; ****p ¼ <0.001

Contracting

1 N ¼ 109 0.116 N ¼ 107

1 n ¼ 135

are planned for (new) housing districts, schools and hospitals in coordination with the municipal district planning. Schools and other municipal facilities are equipped with solar cell installations which belong to the generation portfolio of 71.2% of local utilities. RES seem to function as a sort of bridging technology allowing for complementary engagement in large, old technologies including large CHP and small-scale customer-driven technologies such as micro CHP and contracting as well. Thus except for large CHP, we find evidence for the postulated synergies among different generation technologies. There is also evidence for the special role of RES which benefits significantly from micro CHP, contracting and even from engagement in large old technologies (H2c). Further we see that there is no evidence for complementarities of micro CHP and large CHP, which points to the competition between the more centralised and decentralised energy concepts. Contracting, contrary to our first guess, is only weakly related to engagement in micro CHP. The next analyses deal with the identification of the determinants furthering or hindering the engagement in generation as a new business field. We analyse the engagement in the four generation profiles identified by the factor analysis. Several models are presented starting with a baseline model controlling for size and/or ownership. In the next steps, variables describing self concepts (market actor, commitment to municipality, commitment to climate change abatement) and actual behaviour in the liberalised market (modern distribution strategy, i.e. addressing industry customers and customers beyond old supply area) and degree of engagement in energy efficiency and green technology promotion are added. In the next steps, relevant types of collaboration and/or the type of ownership is regarded. Finally, selected technical synergies are analysed. Table 2 presents the results of regression on generation activity irrespectively of technologies. Size is introduced here by three dummy variables to get an impression of potential thresholds for generation. Size is shown to be an important enabling factor for generation as postulated in hypothesis 2d. The positive effect of size can be explained partly by the fact that medium sized and large utilities are more often

16

D. Jansen

Table 2 Determinants of engagement in energy generation (logistic regression) Model 1 Model 2 Model 3 Model 4 Model 5 Size of the municipal utility Reference 25,000 inhabitants 25,001–50,000 1.471** 1.453** 1.255** 1.279** 1.301** 50,001–100,000 1.471* 1.491* 0.791 0.456 .449 100,001–1,300,000 1.898** 1.851** 1.177 1.225 1.256 Self concept of market actor 1.030* 0.842 0.898 0.863 Modern distribution strategy 2.183** 2.285** 2.446** Horizontal cooperation in distribution 1.257** 1.349** Private shareholdings .554 Constant .543 .261 .219 .808 .624 Log likelihood 57.661 55.995 52.793 49.695 49.148 LR chi2 12.50 15.83 22.24 28.43 29.53 Prob > chi2 0.0058 0.0000 0.0005 0.000 0.0001 Pseudo R2(MF) 0.098 0.124 0.1740 0.222 0.231 N 125 125 125 125 125 *p 0.1; **p 0.05; ***p 0.01; ****p 0.001

engaged in modern distribution strategies and horizontal cooperation (see models 3 and 4). Albeit two relevant thresholds stay relevant: overcoming the critical mass of 25,000 inhabitants (p < 0.05), and the threshold of 100,000 inhabitants (p ¼ 0.15). Horizontal collaboration in distribution has a strong and significant positive effect on engagement in generation. Thus we find evidence for hypothesis 3c. Private ownership has a non-significant negative effect (p ¼ 0.29) (c.f. hypothesis 3b). The complete model 5 has a pseudo R2(MF)6 of 23.1% and is highly significant. The following analysis deals with utilities which are active in generation and are characterised by a specific generation profile. Table 3 sheds light on the factors that have an effect on engagement in established generation technologies (fossil fuels, large waterpower) except large CHP. Size is controlled here and in further analyses by a quasi metric variable with four categories. Size is slightly significant in model 2 when private shareholdings are added to the model corroborating hypothesis 2d. Private ownership has a negative effect as expected, but it is not significant (p ¼ 0.19,

6

The significance level of coefficients and the fitted models depend not only on the size of effects but also on the number of cases which is quite low here. Since logistic regression is based on maximum likelihood estimation, there is no measure of explained variation as in ordinary least square regression. Instead McFaddens’s pseudo R2 can be interpreted as the proportional reduction in the likelihood ratio. It calculates the difference between the loglikelihood of the model under evaluation and the loglikelihood of the zero-model (constant only). This difference is standardized on the loglikelihood of the zero model. LR chi2 (also known as -2LL) increases with the model fit and follows a chi2 distribution. Pseudo R2(MF) can also be interpreted as the rate of information gained when using the model evaluated instead of the zero model (Shtatland et al. 2002). Measures of pseudo R2 in general are much lower than OLS R2 (Hosmer and Lemeshow (2000: p. 167). Values above 0.2 must be considered as indicating a model fitting very well.

Local Utilities in the German Electricity Market and Their Role in the Diffusion Table 3 Determinants of engagement in large fossil-fuel (logistic regression) Model 1 Size of the municipal utility (4 categories, quasi metric) 0.283 Private Shareholdings Vertical cooperation with TNO in distribution Modern distribution strategy Constant .809** Log likelihood 66.547 LR chi2 2.52 Prob > chi2 0.112 0.019 Pseudo R2(MF) N 101 *p 0.1; **p 0.05; ***p 0.01; ****p 0.001

17

based and established technologies Model 2 0.313* .531

Model 3 0.181 .544 2.152**

.650* .595* 65.791 63.318 4.04 8.98 0.133 0.030 0.030 0.066 101 101

Model 4 .0290 .609 2.620** 1.085** .757** 60.868 13.88 0.0077 0.102 101

model 4). The positive effect of size again overlaps with cooperation strategies and distribution strategies. Larger utilities tend to collaborate with large suppliers more often (c.f. Chap. 4 in this volume) and more often have adopted a modern distribution strategy. Thus, the size has no relevant effect in the full model. Cooperation in distribution with TNOs and their subsidiaries has a strong positive effect. This can be explained by the benefit of an efficient distribution strategy for the marketing of electricity generated. The information exchange on best practice in customer relationship management and the knowledge of potential customers may provide access to better sales opportunities. Finding customers is essential for the profitable operation of large power plants. Thus, we find evidence for hypothesis 3b postulating a positive effect of vertical cooperation in the case of large established generation technologies. An orientation to sales outside the established supply area combined with a focus on industry customers helps to develop one’s sales opportunities and furthers the engagement in large generation, too. This confirms again hypothesis 2a on the positive role of innovations in distribution. Both effects are significant at the 5% level. The complete model is significant. Pseudo R2(MF) amounts to 10%. With respect to generation based on RES the picture is different (Table 4). Again there is a size effect loosing significance in the more complete models which include cooperation in distribution and generation (showing evidence for hypothesis 2d). The thresholds for gaining a critical size are the same as for generation in general. Private shareholdings have a significant negative effect which looses some of its significance with the entering of vertical cooperation into model 5.This corroborates hypothesis 3a. Becoming a market actor and taking up the new chances in distribution have positive effects as expected (H2a and b), but admittedly are small and not significant. The commitment to a climate change abatement strategy and the engagement in customer energy-efficiency services and the promotion of green technologies have strong and partly significant effects on the engagement in RES. Vertical collaboration in distribution has a strong negative effect, thus again confirming hypothesis 3a. The effect of formal horizontal collaboration is positive,

18 Table 4 Determinants of engagement in RES (logistic regression) Model 1 Model 2 Model 3 Model 4 Size of the municipal utility (4 categories, quasi-metric) 0.309* 0.351* 0.319 0.175 Private Shareholdings .838* .846* .967** Self concept as market actor 0.285 0.262 0.309 Modern distribution strategy 0.205 – Priority of climate change abatement strategy 0.268 Degree of engagement in promotion of energy efficiency and green technologies 0.322 Vertical cooperation in grid management Formalized horizontal cooperation in generation Engagement in large CHP Constant .347 .330 .341 1.367 Log likelihood 68.431 66.501 66.403 63.998 LR chi2 3.06 6.93 7.12 11.93 Prob > chi2 0.0801 0.0743 0.1296 0.0358 Pseudo R2(MF) 0.022 0.05 0.051 0.085 N 101 101 101 101 *p 0.1; **p 0.05; ***p 0.01; ****p 0.001

D. Jansen

Model 5

Model 6

0.022 .627

0.048 .630

0.272

0.338

–

–

0.346

0.290

0.378*

0.351

1.266**

1.233**

0.588

0.539

1.388 60.311 19.30 0.0073 0.138 101

0.384 1.576 59.517 19.43 0.0127 0.140 101

but moderate in size (H3c). Both collaboration effects cover a part of the size effect, too, since small utilities collaborate more often in grid management with suppliers and collaborate less often formally in generation projects. The engagement in large CHP does not have a significant effect on RES other factors being controlled for. The full model significantly improves the estimation, pseudo R2(MF) amounts to 14%. While for engagement in RES there are significant size thresholds, for large CHP the size dummies were not significant (Table 5). Almost half of small utilities below 25,000 inhabitants operate a traditional CHP plant and about three quarters of those with 25,000–50,000 and 50,000 to 100,000 inhabitants operate at least one. 80% of utilities above 100,000 inhabitants are engaged in CHP. Private ownership has a significant negative effect (p ¼ 0.121) on the engagement in large CHP. This corroborates again hypothesis 3a stipulating a reservation of private shareholders against competition in generation from local utilities. But in the models 5 and 6, the effect looses significance. Modern distribution strategies and a concept as a market actor do not affect the engagement in large CHP relevantly. Instead, a focus

Local Utilities in the German Electricity Market and Their Role in the Diffusion

19

Table 5 Determinants of engagement in large CHP (logistic regression) Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Size of the municipal utility 0.123 0.172 0.201 0.169 0.143 0.144 Private shareholdings .837 .812 .807 .621 .591 High municipal orientation 1.976* 1.987* 1.915* 1.889* Modern distribution strategy 0.169 0.068 – Formal horizontal cooperation in generation 0.031 .117 – Degree of engagement in renewables 0.210 0.204 Constant 1.242**** 1.559**** 1.238** 1.204** 0.972* 0.964* Log Likelihood 50.108 48.759 45.923 45.879 44.219 44.236 LR chi2 0.31 3.01 8.68 8.76 8.81 8.77 Prob > chi2 0.5783 0.2225 0.0339 0.1188 0.1848 0.0671 0.0031 0.0299 0.0863 0.0872 0.0906 0.0902 Pseudo R2(MF) N 101 101 101 101 100 100 *p 0.1; **p 0.05; ***p 0.01; ****p 0.001

on established relations to the municipality and to regional large customers is important. This confirms hypothesis 2b and provides further evidence for a competition between old large and new small CHP technologies. Contradictory to hypothesis 3c, horizontal collaboration does not have an effect, showing that neither knowledge transfer nor the gaining of a critical size is an issue in the field of large CHP. Large CHP does not show significant synergies to other energy efficient generation technologies, neither to RES nor to small CHP (not reported in Table 6). Thus, within the generation portfolio of local utilities, large CHP resembles large fossil based plants and water power. The mechanisms driving investment in generation in these established technologies are different from those driving more innovative technologies such as RES and micro CHP. The complete model is significant and pseudo R2(MF) only amounts to 9%. Since engagement in large CHP does not discriminate between local utilities – all except the smallest utilities are traditionally engaged in it – the explanatory power is quite restricted. Micro CHP is still rare in the generation portfolio of local utilities. Contradictory to hypothesis 2d, size has no effect on the engagement in micro CHP. The type of ownership again has a strong effect. Confirming hypothesis 3a, private shareholders clearly have a negative influence on the engagement. The ownership effect looses some of its significance because of being correlated to collaboration strategies (c.f. Chapt. 4 in this volume). Horizontal collaboration correlates negatively, vertical cooperation positively with private shareholdings. Vertical collaboration

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D. Jansen

Table 6 Determinants of engagement in micro CHP (logistic regression) Model 1 Model 2 Model 3 Model 4 Model 5 Size of the municipal utility 0.234 0.223 0.158 0.103 0.062 Private shareholding

.994** 1.055** 1.083**

Self concept as market actor

0.381

Modern distribution strategy

Model 6 0.075

.975**

.956*

.914*

0.353

–

–

–

0.413

0.421

0.357

0.211

Horizontal cooperation in generation

0.440

0.520

0.371

Horizontal cooperation in distribution

0.201

–

–

Vertical cooperation in generation

1.749*

Engagement in Contracting

.495

Engagement in large CHP

.340

Degree of Engagement in Renewables Constant Log Likelihood LR chi2

1.788*

0.611*** .578* 63.319 5.81

.858

.896

0.861

62.609

62.236

61.709

6.35

7.10

8.15

1.241**

0.587*** 1.127*

52.876

53.585

23.74

23.51

Prob > chi2

0.055

0.096

0.1308

0.148

0.0013

0.0014

Pseudo R2(MF)

0.044

0.048

0.054

0.062

0.1833

0.180

N 102 101 101 *p 0.1; **p 0.05; ***p 0.01; ****p 0.001

101

100

100

with suppliers in generation has an additional and even stronger negative effect. This shows that the transfer of resources and knowledge from large suppliers is quite a specific phenomenon. We do not find other evidence for it than the case of large fossil fuel or water power technology. The case of small CHP clearly corroborates hypothesis 3a implying that vertical collaboration in generation will prevent local utilities from investing in small distributed generation technologies. Next to the obvious problem of competition for customers and resources, it can also be questioned whether large suppliers have the necessary knowledge for micro CHP at all. In the interviews we found several statements that implied a bottom-up transfer of knowledge from utilities to large suppliers in small and large CHP. Knowledge transfer instead seems to be driven by the degree of engagement in RES with a strong positive effect. Horizontal collaboration variables have positive signs

Local Utilities in the German Electricity Market and Their Role in the Diffusion

21

but fail to be significant. Values and interests have little effect on micro CHP either. The effect of customer and market orientation is small and not significant. Contradictory to hypothesis 2a, even the effect of innovations in distribution is not significant. Contradictory to hypothesis 2c, municipal orientation has no effect at all (not included in Table 6). The models 5 and 6 are highly significant and pseudo R2(MF) is substantial with 18%. Since all distribution related variables fail to be significant, one could speculate that the bottleneck for engagement in micro CHP is not so much the customer, but technological knowledge. This interpretation is further confirmed by the strong positive effect of the degree of engagement in RES technologies. The broader the RES portfolio of a local utility is, the more probable is an engagement in micro CHP. This confirms hypothesis 2c on the relevance of knowledge spill over and underlines the special role of knowledge in RES for other small scale technologies. Both contracting and large CHP have a negative influence on the engagement in small CHP. Here, obviously the infrastructure sunk cost of large CHP and the competition for customers play a negative role. Thus, positive synergies among technologies seem to be largely confined to the RES.

7 Discussion and Conclusions Summing up, we can observe a profound change of the institutional set-up of the electricity market in Germany. On the one hand, market-making regulation has been strengthened by the change to ex ante control of grid access, tightening unbundling norms and a change from a cost plus regime to a revenue cap for network fees. On the other hand, the first phase of liberalisation was characterised by an increase in vertical integration. The market concentration is still high. The market for electricity generation and the wholesale market are dominated by the four large TNOs. The competition in the retail market suffers from the low inclination of end-customers to change suppliers. Finally, despite a new regulation of access to the grid, there is still a considerable backlog of plants waiting for connection. However, market-correcting regulation complementary to the liberalisation efforts was strengthened, too. The CHP law (2002) and the RES act (2000) were amended to create protected market niches for energy efficiency technologies and RES. Further amendments in 2008, 2009 and 2010 stabilized these markets particularly aiming at generation profiles of local utilities. However, the changes in the allowed life-span of nuclear plants by the newly elected government made investments into energy efficient and ecologic generation technologies much more risky. This study was able to show that liberalisation and environmental regulation effectively changed the self concepts (values) and the engagement in upstream and downstream business in the value chains (interests) of local utilities. Utilities increasingly take up new chances such as selling electricity beyond the old supply area or entering the market for balancing electricity (H1b). Market and customer

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D. Jansen

orientation not necessarily conflict with environmental values as is shown by the factor analysis of attitudes and values of local utilities. Becoming a marketorientated actor is worth it for local utilities. Sales trends for those with old and new distribution strategies differ significantly (H2b). Engaging in CHP and RES is much driven by incentives from environmental regulation, particularly for RES. RES play a pivotal role in the generation portfolio of local utilities. RES technologies provide synergies to other small scale technologies (micro CHP, contracting) as well as to large CHP (H2c). A strong commitment of local utilities to the municipality as supposed in hypothesis H2b furthers their engagement in large CHP, probably because they allow stable contracts for heat delivery with large customers such as municipally owned housing companies and public facilities. However, this benefit comes at a cost which shows up in the negative effects on contracting (cf. Chapt. 2 in this volume). While a high market orientation seems to foreclose a strong municipal commitment, a high priority for climate change abatement goes together with a self concept as a market actor in their positive influence on engagement in RES (H2d). Effects of market and customer orientation and innovations in distribution are particularly strong in service-related fields such as contracting and fossil-fuel based large generation, whilst effects in micro CHP and RES are small. Both fields seem to be more driven by environmental regulation, feed-in tariffs and technological issues. Size and resources of utilities are clearly limiting factors for their generation capacity (H2d). Albeit, distributed generation such as RES offer chances to even small utilities to enter the business field of generation. Lacking economies of scale and know-how partly can be overcome by horizontal collaboration networks of local utilities. Size restrictions can even be overcome in large fossil-fuel based technologies. Those local utilities probably hold virtual shares of output in plants operated by large suppliers. Vertical collaboration in distribution and a modern distribution strategy characterise this type of generation profile (H3b), while all more innovative profiles are characterised by a benefit from horizontal collaboration (H3c). This paper set out to explore the effects of the new institutional set-up of the German energy market on self concepts, values and behaviour of local utilities. In particular I wanted to find out whether market liberalisation and re-regulation by market-correcting measures further or hinder local utilities to promote energy efficiency innovations and green technologies. We found evidence that the institutional set-up embraces both, market-making regulation putting efficiency pressures on local utilities, and market-correcting regulation offering niches for an engagement in CHP and RES and removing partly the pressure of liberalisation. Most local utilities indeed became private market actors by legal form, as well as with respect to postulated self concepts and operations. New options such as sales beyond old supply areas or trading of balancing energy were entered successfully. Market orientation goes along with environmental orientation and climate change abatement measures in promoting engagement in RES. Feed-in tariffs successfully created niches for the adoption and diffusion of energy efficiency technologies and RES. They play an important role in the strategies and decision making on engagement in generation, particularly for RES.

Local Utilities in the German Electricity Market and Their Role in the Diffusion

23

Another question posed aimed at the factors which are driving and hindering the adoption of innovations in service and generation. The data show that the argument of size restrictions for local utilities can well be overcome – in most cases innovations in services and collaboration strategies can neutralize the lack of economies of scale. Thus, an orientation towards markets and sustainability combined with horizontal collaboration may enable local utilities to take on their role in the promotion of energy efficiency technologies and green generation technologies. Large CHP used to be the traditional domain of two thirds of local utilities, albeit RES (53%) may be the more important driver for innovations. Contrary to large CHP (and large fossil-fuel based and other established technologies), RES correlates positively with all other generation technologies and contracting. Micro CHP and contracting strongly profit from knowledge transfer through the parallel engagement in RES. There are little problems with competition and sunk cost between the technologies. Complacency due to strong embeddedness into municipal networks seems to be absent in these fields. Finally, what did we learn on the role of collaboration and vertical integration? As mentioned before, collaboration is essential for a successful engagement in generation particularly in new business fields such as RES, contracting, or micro CHP. Horizontal collaboration is the most important driver for the engagement of local utilities in energy efficiency and climate change mitigation technologies. Vertical collaboration has a negative effect on all types of generation except fossilfuel based generation. Private shareholding has consistently negative effects on the engagement of local utilities in generation. Drawing some policy conclusions from the evidence presented here, I plea for a continuation of a policy of market opening and for a strict antitrust policy. Solutions will have to be found to enable local utilities with minority shares of the duopoly to engage in joint ventures in generation, distribution, and portfolio and grid management. Horizontal collaboration of local utilities not only in grid management but in other areas allowing for shared services (IT, metering, billing) should be encouraged by the municipalities and the regulation authorities. A stable and foreseeable policy of promoting the niches for RES and CHP should be continued too. The special role of RES in the overall generation portfolio of local utilities should gain more attention here. If local utilities strengthen their market and service orientation and pool resources in horizontal joint ventures and alliances they may then become the drivers of the diffusion of energy efficiency innovations and green technologies in the market. Acknowledgements Research funding by the Volkswagen-Stiftung and assistance in data collection and analysis by Sven Barnekow and Ulrike Stoll are gratefully acknowledged.

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ATKearny (2007a) Liberalisierung des deutschen Strommarktes. Wer profitiert, wer verliert? Presentation. Berlin, Jan 2007 ATKearny (2007b) Demografischer Wandel setzt regionale Energieversorger unter Zugzwang. Press Release. D€usseldorf. Berlin, 4 July 2007 Borgatti SP, Cross R (2003) A relational view of information seeking and learning in social networks. Manage Sci 49(4):432–445 Bundeskartellamt (ed.) (2011) Sektoruntersuchung Stromerzeugung, Stromgroßhandel. Bericht gem€aß }32e Abs.3 GWB. Bonn Bundestagsdrucksache 17/34049 (2010) Energiekonzept f€ur eine zuverl€assige und bezahlbare Energieversorgung und 10-Punkte Sofortprogramm. Deutscher Bundestag (ed.), Berlin Bundesverband der Energie -und Wasserwirtschaft (BDEW) (2008) Energiewirtschaft investiert €uberdurchschnittlich. Press Release. Hannover, 21 Apr 2008 Bundesverband der Energie -und Wasserwirtschaft (BDEW) (2009) Im Bau oder in Planung befindliche Kraftwerke. Berlin 9 Apr 2009 Carlsson B, Jacobsson S, Holmen M, Rickne A (2002) Innovation systems: analytical and methodological issues. Res Policy 31(2):233–245 Cohen W, Levinthal DA (1990) Absorptive capacity. A new perspective on learning and innovation. Adm Sci Q 35:128–152 Coleman JS (1990) Foundations of social theory. The Belknap Press, Cambridge DiMaggio PJ, Powell WW (1991) The iron cage revisited. Institutional isomorphism and collective rationality. In: Powell WW, DiMaggio PJ (eds) The new institutionalism in organizational analysis. University of Chicago Press, Chicago, pp 63–82 Edeling T (2006) Die Institution der € offentlichen Wirtschaft. In: Jann W, R€ober WM, Wollmann H (eds) Public Management – Grundlagen, Wirkungen, Kritik. Edition sigma, Berlin, pp 61–70 ¨ ffentliche Unternehmen zwischen Privatwirtschaft Edeling T, St€olting E, Wagner D (eds) (2004) O und €offentlicher Verwaltung. VS Verlag, Wiesbaden Edquist Ch (ed) (1997) Systems of innovation. Technologies, institutions and organisations. Pinter, London Eickhof N, Kreikenbaum D (1997) Liberalisierung des Energiewirtschaftsrechts und Bef€urchtungen der Kommunen. Wirtschaftsdienst. Z Wirtschaftspolitik 77(5):276–283 Ernest&Young in collaboration with BDEW (2008) Stadtwerkestudie 2008. Wettbewerb in den Energiem€arkten. D€ usseldorf Forthmann J, Czotscher E (2002) Branchenkompass Energieversorger. Hamburg and Frankfurt: Mummert + Partner Unternehmensberatung AG und F.A.Z.-Institut f€ur Management-, Marktund Medieninformationen GmbH Hansen MT (2002) Knowledge networks: explaining effective knowledge sharing in multiunit companies. Organ Sci 13(3):232–248 He´ritier A (2001) Market integration and social cohesion. The politics of public services in European regulation. J Eur Public Policy 8:825–852 Hedstr€om P, Swedberg R (eds) (1998) Social mechanisms. An analytical approach. Cambridge University Press, Cambridge Hosmer DW, Lemeshow S (2000) Applied logistic regression, 2nd edn. Wiley, New York Jansen D (1996) Nationale Innovationssysteme, Soziales Kapital und Innovationsstrategien von Unternehmen. Soziale Welt 45(4):411–434 Jansen D (2005) Von Organisation und M€arkten zur Wirtschaftssoziologie. In: Faust M, Funder M, Moldaschl M (eds). Die Organisation der Arbeit. Rainer Hampp, M€unchen and Mering, pp 227–258 Kemp R, Schot J, Hoogma R (1998) Regime shifts to sustainability through processes of niche formation: the approach of strategic niche management. Technol Anal Strateg Manage 10(2): 175–195 Krippner GA, Alvarez AS (2007) Embeddedness and the intellectual projects of economic sociology. Annu Rev Sociol 33:219–240

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Municipal Utilities and the Promotion of Local Energy Efficiency Projects Sven Barnekow and Dorothea Jansen

1 Introduction This article focuses on the innovation potential of energy efficiency services which emerge from the close relationship between municipal utilities and customers. With the liberalisation of the German energy market in 1998, the municipal utilities faced for the first time the challenge of bonding local business customers in an enduring relationship. At the same time and parallel to a discussion about the rise of energy prices and the ecologic consequences of energy generation, the public placed pressure on the utilities to decrease the use of fossil fuels in energy generation. Energy efficiency services such as contracting have a high potential to serve both goals and to ensure the market position of municipal utilities in the German energy market. Municipal utilities may use the opportunity to achieve these goals via the readjustment of their sales activities and the implementation of innovative energy services. Many customers, especially in the business sector, have at the same time to search for ways to reduce their overhead. Especially those customers with a need for electricity and heat or steam have a high potential to intensify the relationship with their local utility in order to build up energy-efficient supply solutions. The following focuses on two central questions. The first question concerns the ongoing processes of change in municipal utilities. We question the potentials and problems the municipal utilities face in a liberalised and competitive market. Second, we shed light on instances of cooperation between municipal utilities and selected customer groups. A deeper analysis shall give insight into the conditions of enabling or restricting collaboration in those projects.

S. Barnekow BDEWe.v., Landesgruppe Norddeutschland, Heidenkampsweg 39, 20097, Hamburg, Germany D. Jansen (*) German University of Administrative Sciences and German Research Institute for Public Administration, Freiherr-vom-Stein-Strabe 2, 67346, Speyer, Germany D. Jansen et al. (eds.), Sustainability Innovations in the Electricity Sector, Sustainability and Innovation, DOI 10.1007/978-3-7908-2730-9_2, # Springer-Verlag Berlin Heidelberg 2012

27

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S. Barnekow and D. Jansen

2 Regulation, Structures and Different Forms of Cooperation The liberalisation of the energy market and the subsequent increase of competition in the sector has lead to changes over the last 10 years which have especially affected the German municipal utilities. Today, private forms of organisation shape the landscape of local utilities (Edeling et al. 2004). While municipal utilities used to have a position as a guarantor of public services of general interest, nowadays new goals, such as new business fields beyond the traditional supply area and new sales concepts, have arisen. With sinking net fees and public discussion about changing the electricity supplier, this process has recently accelerated. Municipal utilities lost their monopoly position in their local demarcated area and nowadays have to pay attention to bonding with private households and business customers if they do not want to loose them in a long run. They need to differentiate between types of customers in order to react to their specific needs and requirements (Moss 1998). Nevertheless, local utilities still focus on the region within which they have been operating for decades (Monstadt and Naumann 2005) and offer new services especially in the local area (FAZ-Institute and Mummert 2005). Here, individual contracting offers might be a key to their success (Truffer et al. 2004). They could benefit from their long-lasting activities in the area. For instance, local utilities have knowledge on demand sets, which are important to energy efficiency projects (Geißler 2005). These strategies are not totally new to the local utilities. Within the last 15 years, least cost planning (LCP) already offered a win-win strategy for reducing energy consumption via the renewal of e.g. heater systems (Hennicke and Seifried 1996; Leprich 1994). With the liberalisation of the energy market, these strategies based on energy efficiency on the customers’ side have now been put into broad practice for the first time. Municipal utilities must build up knowledge in energy efficiency, but also transfer this knowledge to potential customers. For these tasks, municipal utilities tend to look for the cooperation of lead users (Zenger and Hensterly 1997). With a view to customer relations, building up networks became a high priority task. Municipal utilities profit from information networks because they offer a perfect precondition for advancing to push forward innovation (Jansen 2005). Close and long-lasting contacts to business customers are based especially on trust rather than on formal contracts. This shows that municipal utilities hold a special position in these networks. Membership of utilities and customers in the same informal information networks is the basis for trust in innovative energy service concepts. Using a targeted acquisition strategy, municipal utilities nowadays are able to communicate the ecologic benefits of new technologies (Richter and Thomas 2007). On the other hand, leaving the customer outside this network might result in less innovative behaviour and/or a reduced openness to energy efficiency innovations. Even inside the sector, cooperation is an important structural determinant for implementing new technologies or services. To withstand the challenges of the liberalised market, the pooling of resources to gain synergies has become a must for municipal utilities. These joint projects often focus on the build-up of know-how in

Municipal Utilities and the Promotion of Local Energy Efficiency Projects

29

areas characterised by specific knowledge and a high technology level (Vera 2005). This might be the case in the attainment of economies of scale, e.g. investments into decentralised energy technology like micro-CHP. Knowledge-intensive services like contracting can be developed with fewer costs as well. Generally, municipal utilities can pursue two different strategic paths here: using horizontal cooperation with firms of a similar size or relying on the shareholding of a larger utility. However, antitrust laws can prevent formal joint ventures, particularly if local utilities are involved with private shareholders. In addition, public law regulating the involvement of municipalities in (private) business ventures may prevent local utilities from engaging in contracting. We also have to stress a classic structural variable, the size of the municipal utility. Large firms have a higher level of professionalisation (Kieser 2006) with differentiated divisions, e.g. a specialised unit focusing on energy efficiency services. This corresponds with the finding that smaller utilities have less potential to put energy efficiency projects into practice (Jochem and Bradke 2005). Transaction costs and the lack of personnel and financial resources can lower engagement here. Since many local utilities run CHP plants for local district heating, a utility needs a large supply area to simultaneously invest in small-scale, de-central CHP and run a natural gas- and district heating infrastructure. In the following, we first introduce the reader to the data and the design of the study underlying the results presented here (Sect. 3). Next we focus on the utilities’ perspective on contracting and energy efficiency services (Sects. 4.1 and 4.2). Here we present some statistical results, obtained from a questionnaire study, on the factors influencing the probability of utilities engaging in contracting. This is complemented by an analysis of questionnaire and interview data, which are combined in a more qualitative analysis conducted on the basis of a fewer number of cases. In Sects. 4.3 and 4.4 we present results from the analysis of two customer groups, butcheries and hospitals, and their relations with their local utilities. We conclude with a summary of the results and some policy recommendations.

3 Data and Design of the Study Data were collected through a questionnaire study of all local utilities in Germany that are active in electricity distribution. The mailed questionnaire was sent out to 628 utilities in spring 2006, (response rate 21%, n ¼ 135). Larger municipal utilities (100,000 inhabitants) are overrepresented (22% compared to 12%) while, respectively, small utilities (<25,000 inhabitants) are underrepresented (36% compared to 50% in the population). Utilities which are members of an association for energy efficiency tended to answer more often (37% compared to 28%). Those with private investors are also slightly overrepresented (43% compared to 40%). Descriptive data such as means and percentages thus have to be interpreted with care. However, causal relationships still can be validly identified provided that the variables accurately represent the range of variation in the data. In the questionnaire we asked, in a special section on selected innovation fields, about experiences in contracting projects and, in the main part, for an assessment of

30

S. Barnekow and D. Jansen

the role of information exchange and cooperation with small and larger business firms. Contracting was measured by “engagement in contracting” (no/yes). The data on the types and the number of contracts was insufficient for statistical analysis. Complementary to the questionnaire study expert interviews with executives of municipal utilities were conducted in the exploratory phase (n ¼ 22) and for validation (n ¼ 3). These data from the perspective of the local utilities were complemented by two studies dealing with the customers’ perspective. They covered butcheries and hospitals in areas corresponding to areas for which there was a response from the utilities. The butchery study (lead by our partner project at the ISI) is based on a standardised questionnaire and some interviews (n ¼ 165). The hospital study is based on 20 qualitative interviews. The matching with the utility data resulted in 52 matched data records for the butcheries and 20 for the hospitals. Size of utility (recoded into four categories) and ownership data (private investors versus municipally owned) were extracted from the MARKUS database.

4 Energy Efficiency Service Innovations from the Perspective of Municipal Utilities1 4.1

Determinants of Engagement in Contracting

Concerning the resource level, we expect the size of local utilities to have a positive effect on engagement in contracting. Size is an important factor determining innovation potential. Any innovation requires some slack resources (Cohen and Levinthal 1990). Larger utilities may profit from economies of scale and scope (multi-utility, synergies among business fields) when engaging in new generation technologies. Small utilities, on the other hand, may be particularly anxious about the risks of investing into new technologies in open markets (Monstadt and Naumann 2005). The larger the organisation, the easier it will be to build-up new knowledge, to find investors and/or to establish networks for knowledge transfer or joint ventures (H1) (Malerba 2002; Powell et al. 2005; Podolny 2005). At the micro level of organisation and technologies in use, new services constitute important business fields that local utilities may develop to survive in competitive markets. Before market liberalisation, most of them were active only in network

1

The empirical findings of the following sections are based on data collected in the research project “Diffusion of energy efficiency and climate change mitigation in the public and private sector” ¨ V Speyer/ ISI Karlsruhe, funded by the Volkswagen Foundation). The data used are based on (FO a questionnaire addressed to all German municipal utilities that are active in the electricity ¨ V), a questionnaire addressed to butcheries (ISI) and expert interviews business (n ¼ 628, FO ¨ V) and hospitals (n¼20, FO ¨ V). All instruments addressed the with municipal utilities (n¼22, FO business managers. We thank the VW Foundation for their support of our research.

Municipal Utilities and the Promotion of Local Energy Efficiency Projects

31

operations and distribution, which are now either regulated or under fierce competition. Thus, we expect strong market and customer orientation and innovations in distribution to have a positive effect on engagement in contracting (H2a). Contrariwise, we expect a strong commitment to the established municipal area to have a negative effect on contracting because of a lack or demand of cannibalisation of investments in traditional CHP (H2b). In the current market, upstream fields (generation) and downstream fields (value-added services, contracting) have to be developed to generate profits. These fields are interdependent. Positive effects on contracting are to be expected by micro CHP (H3a) and small-scale RES (H3b) directed at private customers. At the meso level of inter-organisational structures we expect private ownership, mostly by regional and national suppliers, and vertical cooperation with TNOs and their subsidiaries to have a negative effect on engagement in contracting (H4a). The technological distance of technologies in use between TNOs/RNOs and local utilities is large. Thus, knowledge transfer will encounter a lot of obstacles. The literature on the determinants of successful alliances provides ample evidence on the role of homophily, geographical proximity, shared values and joint understanding of tasks in producing trust and lowering the transaction costs of collaboration (H4b) (Wald and Jansen 2007; Owen-Smith and Powell 2004; Borgatti and Cross 2003; Hansen 2002). On the other side, we expect horizontal collaboration to have a positive effect on contracting because of economies of scale and scope obtained through the pooling of resources and knowledge transfer. However, as some expert interviews in the validation phase showed, smart shareholders and collaborating suppliers may be interested in vertical collaboration and/or in financing the profitable business aspects of local utilities (H4c). Table 1 presents the results from a regression analysis on engagement in contracting, identifying the determinants that further or hinder engagement in this new business field. Sections 4.2–4.4 will complement these results with qualitative evidence on the reasoning of local utilities and their customers which lie behind these effects. As you can see in models 1–6, the size of local utilities has a strong positive effect on engagement in contracting (H1 corroborated). It looses in significance with the introduction of action related variables (distribution strategy, cooperation strategies) that depend on size related resources. As models 2 and 3 show, there is a positive effect of conceiving of oneself as a market actor and of behaving like a market actor by adopting new distribution strategies (H2a). However, the effect of self concept is not significant. It looses relevance over the course of the introduction of distribution strategies and is dropped in models 5 and 6. As expected in hypothesis 3b, high municipal commitment has a negative effect on engagement in contracting (p ¼ 0.219 in the final model 7). Private ownership is correlated with collaboration strategies and did not have a unique effect on contracting. Effects of collaborations have the expected signs. Formal horizontal cooperation in distribution has a positive and highly significant effect. Cooperation with TNOs or RNOs has a sizable negative effect with a significance level of 0.125 (c.f. model 5). This corroborates hypothesis 4a and 4b, while hypothesis 4b on a positive effect of vertical collaboration is refuted.

.755

.703**

0.142

N 133 *p 0.1; **p 0.05; ***p 0.01; ****p 0.001

0.0000

Pseudo R2(MF)

25.56

77.045

Prob > chi2

LR chi2

Log likelihood

Constant

126

0.126

0.0000

21.74

75.178

126

0.132

0.0000

22.69

74.702

126

0.156

0.0000

26.84

72.626

126

0.206

0.0000

35.46

68.317

126

0.220

0.0000

37.92

67.084

.600*

1.421* .285

1.699**

0.819

0.842

.908

.736

0.416

Model 7

.471

0.643***

Model 6

100

0.273

0.0000

36.01

47.891

1.161**

0.649*** .770

0.966*

1.039** 1.788***

.443

0.197 .301

0.529**

Model 5

0.391

0.655***

Model 4

.437

0.813****

0.042

.845*

0.347

0.809****

Degree of engagement in renewables

.564***

0.875****

Engagement in small CHP

Vertical cooperation in generation

Formalised horizontal cooperation in distribution

Modern distribution strategy

High municipal commitment

Self concept as market actor

Size of the municipal utility

Table 1 Determinants of engagement in contracting (logistic regression) Model 1 Model 2 Model 3

32 S. Barnekow and D. Jansen

Municipal Utilities and the Promotion of Local Energy Efficiency Projects

33

Collaboration strategies are correlated with engagement in small-scale CHP and RES with positive effects of horizontal collaboration and negative effects of vertical collaboration (cf. model 6). This explains why the negative effect of vertical cooperation in generation looses relevance in model 7. As postulated in hypotheses 3a and 3b, there is a positive effect of engagement in RES. However, the small positive effect of small-scale CHP (not reported in Table 1) vanishes when RES is included. Thus, there is evidence for technical synergies, for an important role of changes in distribution strategies (H2a), and of horizontal collaboration in generation (H4a) furthering engagement in contracting. On the other hand, a narrow commitment to the municipality (H2b) and vertical collaboration in generation (H4b) tend to prevent local utilities from entering into contracting. The complete model has a pseudo R2 (MF) of 27.3% and is highly significant.

4.2

4.2.1

Energy Efficiency Strategies of Municipal Utilities: Opportunities and Barriers Seizing the Opportunities of Market Liberalisation

83% of the utilities in the sample reacted to the liberalisation of the energy markets with the enlargement of their service portfolio, while meeting the requirements of the customer is relevant for 80% of them. As municipal utilities can rely on their traditional know-how in CHP and the knowledge of their customers’ consumption patterns, there is a strong correlation between service orientation and contracting activities. 78% of the municipal utilities with high engagement in services are active in contracting compared to 31% of those without a strong service orientation. The engagement is not focused mainly on short-term maximisation of profits but is instead part of their customer relationship management. Long-term contracts offer the large benefit of planning reliability concerning the distribution of gas or electricity in a volatile market. Bonding with the customer is, therefore, more important than a higher profit rate. This is reflected in the following quote from an interview with the business manager of a municipal utility: The main reason to engage [in Contracting] is the efficiency, but we do not earn too much, what we actually do is customer bonding. This is the main reason to engage in contracting.

Taking a look at structural factors that promote the start-up of energy efficiency activities, we see size has a positive influence. Municipal utilities with a supply area of more than 50,000 people are far more active in contracting than the smaller ones. This might indicate that there is an important role for in-house resources, ranging from financial resources to specific knowledge in specialised divisions, for this business activity. Moreover, horizontal cooperation has a positive effect, which also supports the thesis on the importance of knowledge. This is supported by the following statement made in an interview:

34

S. Barnekow and D. Jansen The consortium has an agency you can call, and it will give you an advice. [. . .] [name of the horizontal cooperation] exchange information regularly, who is responsible in which company and who is the expert for a specific division.

This corroborates the role that the exchange of knowledge plays in increasing the chances of engagement in energy efficiency services within peer networks. Data also show a synergy between efficiency activities and other innovative practices. Contracting activities are closely linked to the engagement of municipal utilities in renewable energies. 78% of those who use renewables are active in contracting, compared to 48% without this activity. There might be synergies in identifying locations or the calculation of net capacities. Activities in biomass- or biogas-plants have a high potential for the mutual-coupling of energy generation and services. 4.2.2

Potentials Based on Close Contact to the Customer

Looking at the relationships between the municipal utility and the customer, there are two more aspects relevant to promoting energy efficiency services. To enter the contracting business successfully, 83% municipal utilities name trust between utility and customer as very important. Municipal utilities can profit from their traditional position and close contacts in the local area. Here, the main task for the municipal utility is to convince the customer of the profits of energy efficiency services. Technical consulting services that measure energy losses might serve as the initial spark for cooperation between the actors. The detection of potentials for optimisation might increase the openness of the customer to new services that depend on collaboration with the municipal utility. With respect to this, an interviewee pointed out: It depends on the cooperation of the customer. It is a new philosophy of supply.

4.2.3

Barriers to Municipal Utilities’ Entry into the Energy Service Business

On the other hand, energy efficiency services face some challenges when first going into operation. On the technical side, service packages like contracting are often linked to the installation of micro-CHP below 50kw of electrical power. The established net-bound infrastructures constitute asset specificities which may block the new paradigm of decentralised supply. The problem stem from the existing gas- and district heating infrastructure and its sunk cost, as an interviewee explained: More than 50% of the customers already use district heating. An additional offer of microCHP would be schizophrenic.

This problem can normally be solved only in a large supply area. Another problem is the need for tailor-made efficiency solutions. Small customer numbers often hinder the attainment of economies of scale, which a business manager explained as follows:

Municipal Utilities and the Promotion of Local Energy Efficiency Projects

35

We cannot duplicate the projects, they are all individual.

Again regional market limits lead to the problem of standardisation of energy services solutions. Often the supplier cannot find enough projects in the region to justify the engagement in energy efficiency services. This problem was confirmed in the interviews by the following statement: Focusing on a municipal utility defining a regional market, the market is too small. It is a supra-regional business.

4.3 4.3.1

Cooperation with Local Actors: Small Trade Firms2 Enabling Effects of Cooperation

Having emphasised the potentials and barriers for energy efficiency services on the side of the municipal utility, we can now take a closer look at cooperation with selected customer groups. First, we will take a look at cooperation with small trade firms. These – in our case represented by the butcheries – usually have no core competencies in energy optimisation due to their concentration on their core business and limited personnel resources. Nevertheless, such firms do offer potential opportunities for municipal utilities if they offer an information-based partnership and initiate follow-up energy efficiency projects. The following chapter shows how these potentials are already used today. Municipal utilities as experts in energy efficiency can activate the consciousness of small trade firms regarding new energy efficiency solutions, which can even lead to investments in energy efficiency innovations if they concentrate on the customer and the cooperation itself. First, there is a correlation between a strong customer orientation of municipal utilities and the awareness of customers concerning the potentials of new technologies for solving environmental problems. While 60% of the butcheries whose local utilities show a strong customer orientation are aware of such potentials, only 14% of the butcheries show such an awareness if the customer orientation of their local utility is low (n ¼ 52). This might indicate a high possibility that municipal utilities are able to transfer knowledge about energy saving potentials to their customers. A strong customer orientation also correlates with the openness of butcheries to the usage of microCHP or contracting. In addition, this openness towards innovations is further supported by a close informational relationship between the trade firm and the municipal utility. A close relationship leads to 67% of the butcheries being interested in innovative energy efficiency products. If there is no informational exchange, only 29% of the butcheries are interested (Cramers’ V ¼ 0.267,

2 For a detailed discussion of the results of our project concerning customer relationships of local utilities c.f. Gruber et al. 2008.

36

S. Barnekow and D. Jansen

sig.0.054, n ¼ 52). The result shows that not only networks within the utility sector have a positive effect. The positioning of municipal utilities as information brokers for the customer is a promising starting point as well.

4.3.2

Barriers to Cooperation Between Municipal Utilities and Butcheries

On the other side, there are also obstacles which hinder joint energy efficiency activities between municipal utilities and customers. The positive effects of a close informational relationship must be qualified, as municipal utilities are not the most important contact for butcheries regarding energy efficiency-related questions. The butcheries tend to use the expertise of manufacturers and local plumbers. Here, they might attempt to search for more neutral information. As an energy supplier local utilities might be seen as not having an interest in selling less energy. The municipal utilities may also miss opportunities by focusing on other, larger customers. 52% of the municipal utilities declared that they follow an intensive informational strategy with industrial clients compared to 25% who do so for small trade firms. As 47% of the butcheries cite the lack of time and/or of market overview (46%) as reasons for their neglect of energy efficiency topics, it is obvious that municipal utilities miss a potential opportunity here. As a consequence, services for small trade firms are also underrepresented. Only 46% of the municipal utilities offer services for such firms, as compared to an average of 58% for all customers.

4.4 4.4.1

Cooperation with Local Actors: Hospitals Enabling Effects of Cooperation

German hospitals were chosen as a second customer group facing a transformation process towards market orientation and efficiency similar to that faced by the municipal utilities. Especially concerning overhead for the maintenance of infrastructure and supply of electricity, gas or steam, clinics identified a high potential for savings. Estimates of energy saving potential made by the hospitals themselves show that there will be much improvement in the next years. 12 hospitals out of 20 rate the potential as high. Now we will discuss if municipal utilities are able to access this market. The preconditions for cooperation with a hospital in an energy efficiency project are very promising. Besides the simultaneous need for electricity and warmth or cooling, contracting offers municipal utilities the chance to externalise the risks of volatile energy prices and to save on capital resources in the renewal of infrastructure. Hospitals show a need for energy savings; municipal utilities search for long-lasting contracts and offer know-how in thermal energy systems. Direct communication might lead to the development of win-win situations for both partners here.

Municipal Utilities and the Promotion of Local Energy Efficiency Projects

37

Hospitals use many sources of expertise in energy-related questions. Concerning the project data, the most important contact is one’s own utility, normally the municipal utility. Here, the municipal utilities can contribute their know-how to the optimisation of real estate and to energy-efficient generation. The cohesiveness of established trust in the utility, as well as established routines of actions between hospital and supplier, seem to be an enabling factor for such cooperation. Similar to the small trade firms, a close informational exchange is the basis for the openness of the customer concerning energy efficiency projects. Interview data show that hospitals which name their utility as the most important contact took the option of contracting into consideration more than usual. On the other side, hospitals, which are normally one of the largest customers, can put pressure on their local utility to develop energy efficiency products by threatening to consider a change in their provider or the development of in-house solutions. Unlike small trade firms, hospitals often use their own resources for energy-related questions and are more specialised. They use active retrieval strategies to influence the fixing of energy prices for their own benefit. In some cases we analysed, the local hospital triggered the activities of the municipal utility concerning contracting. With a view to the data, one out of three hospitals initiated such activities by the municipal utility. Local utilities might then transfer these experiences with a lead customer to other customer groups.

4.4.2

Barriers to Cooperation Between Municipal Utilities and Hospitals

Most of the hospitals have experience with professional energy consulting to promote the optimisation of their real estate. At first sight, it seems contradictory that their utility is the most important contact in energy-related questions, while other actors are more often hired for the analysis of the saving potentials for the hospital. Again, a possible reason might be that the municipal utilities with their supply tradition are often not taken seriously as neutral consultants regarding energy savings. Municipal utilities are again not able to use their role as the most important source of information to get into contracting projects. Hospitals that already use contracting with other partners claim higher prices and the lack of specific knowhow as the main reasons for their decision. A final barrier is the changing market structure within the health sector due to privatisation and concentration of ownership. The competitive advantage of municipal utilities, marked by their tradition as a local partner, gets lost as national and supra-national corporate groups take over more and more municipal hospitals. Such groups have no long-lasting deep relationship to the municipal companies or local administrative units. Sales strategies of municipal utilities which focus on local customers might fail in these cases.

38

S. Barnekow and D. Jansen

5 Results and Policy Recommendations First, we observed that the size of a municipal utility and legal restriction on business activities can hinder the build-up of know-how and innovative energy efficiency strategies. Potentials get lost, which supra-regional large providers can use at the expense of municipal utilities. The key to solving this problem is networking capacities. Municipal utilities might preserve their opportunities by coupling regional and supra-regional strategic elements. Especially supra-regional cooperation of utilities offers the possibility to develop know-how and products within a peer group of municipal partners and to assure attractive prices for systems engineering. At the same time, sales activities stay focused on the local area of the municipal utility where it can use its traditional relationships and closeness to the customers to gain a competitive advantage. As another result, we can claim that the hypotheses on synergies between climate-friendly, innovative supply solutions and the build-up of energy efficiency services were corroborated. We find strong correlations especially between renewables, micro CHP and contracting. Municipal utilities dealing with biomass or biogas are far more able to act as a contracting service provider. This supports the idea of developing innovative sales strategies at the same time as innovative generation projects are built up. The new Act on the Promotion of Renewable Energies in the Heat Sector (Erneuerbare-Energien-W€arme-Gesetz EEW€armeG) might serve as an enabling factor for this strategy. An important problem for municipal utilities is the low interest and lack of willingness of customers to invest in decentralised energy supply solutions. Both the municipal utilities’ and customers’ statements in the interviews show that the discovery of saving potentials might be an important precondition for gaining the attention of the actors and increasing their interest in energy efficiency projects. This might be the first step to get them to start investing in the long run. Energy savings must be transformed into quantifiable monetary parameters with enough transparency to allow for a goal-oriented cost-benefit analysis of investments. For the municipal utilities, an increased engagement in the business segment of energy consulting can be fruitful. There might be a positive trigger effect by smart meters entering the market due to the liberalisation of measurement in the electricity sector. While long-lasting relationships constitute an important advantage for local utilities, being a supplier of energy is a disadvantage as it results in low credibility as a supplier of energy savings services. Close cooperation with local craftsmen might help to mitigate this problem. Local plumbers might be seen as more neutral consultants who are especially able to address private customers and small trade firms and who might also be able to grasp concrete needs more precisely. Considering the concrete strategies of municipal utilities concerning the two selected customer groups, we can state that the potential to transfer knowledge about energy efficiency products is high. Local utilities are still the most important contact dealing with energy-related topics. However, the transfer of information often does not lead to actual projects. Municipal utilities must cease playing the role

Municipal Utilities and the Promotion of Local Energy Efficiency Projects

39

of an informant and become a more activating partner. A fruitful starting point could be the coupling of tailor-made concrete energy efficiency services with consulting services like detecting leaks and repairing those leaks for free. This pro-active strategy could also be supported by the liberalisation of measurement in the electricity sector with IT-based systems advancing the transparency of consumption, thus simplifying the entrance into or further development of energy efficiency services.

References Borgatti S, Cross R (2003) A relational view of information seeking and learning in social networks. Manag Sci 49:432–445 ¨ ffentliche Unternehmen Edeling T, Lieske S, Rogas K, Sitter R, St€ olting E, Wagner D (2004) O zwischen Privatwirtschaft und € offentlicher Verwaltung. Eine empirische Studie im Feld kommunaler Versorgungsunternehmen. Verlag, Wiesbaden Geißler M (2005) Energiedienstleistungen im Lichte des EU-Richtlinienvorschlags zur Endenergieeffizienz. In: KfW-Group Political Economics Department (ed) Energie effizient nutzen: Klima sch€ utzen, Kosten senken, Wettbewerbsf€ahigkeit steigern. Frankfurt/Main, pp 46–57 Gruber E, Ostertag K, Jansen D, Barnekow S, Stoll U (2008) Stadtwerke als Katalysator innovativer Energiekonzepte in mittelst€andischen Betrieben? Zeitschrift f€ur Umweltpsychologie 12(1):8–27 Hansen MT (2002) Knowledge networks: explaining effective knowledge sharing in multiunit companies. Organ Sci 13:232–248 Hennicke P, Seifried D (1996) Das Einsparkraftwerk – eingesparte Energie neu nutzen. Verlag, Basel Jansen D (2005) Von Organisationen und M€arkten zur Wirtschaftssoziologie. In: Faust M, Funder M, Moldaschl M (eds) Die “Organisation” der Arbeit. Verlag, M€unchen/Mering, pp 227–258 Jochem E, Bradke H (2005) Entwicklung der Energieeffizienz in Industrie und Gewerbe’. In: KfW-Group, Political Economics Department (ed) Energie effizient nutzen: Klima sch€utzen, Kosten senken, Wettbewerbsf€ahigkeit steigern. Frankfurt/Main, pp 31–45 Kieser A (2006) Der situative Ansatz. In: Kieser A, Ebers M (eds) Organisationstheorien. Verlag, Stuttgart, pp 215–264 Leprich U (1994) Least-Cost Planning. Ein neues Planungs- und Regulierungskonzept f€ur die ¨ ko-Institut, Freiburg Energiewirtschaft. O Malerba F (2002) Sectoral systems of innovation and production. The Danish model. Elgar, Cheltenham Monstadt J, Naumann M (2005) Neue R€aume technischer Infrastruktursysteme. Forschungsstand und Perspektiven des Wandels der Strom- und Wasserversorgung in Deutschland‘. netWORKS papers No. 10. Berlin Moss T (1998) Neue Managementstrategien in der Ver- und Entsorgung europ€aischer Stadtregionen. Perspektiven f€ ur den Umweltschutz im Zuge der Kommerzialisierung und Neuregulierung. In: H.-J. Kujath, T. Moss, T. Weith (eds) R€aumliche Umweltvorsorge. ¨ kologisierung der Stadt- und Regionalentwicklung. Berlin, pp 211–240 Wege zu einer O Mummert Consulting, F.A.Z. Institute (2005) Branchenkompass Energie. Hamburg/Frankfurt M Owen-Smith J, Powell WW (2004) Knowledge networks as channels and conduits: the effect of spillovers in the Boston biotechnology community. Organ Sci 15:5–21 Podolny J (2005) Status-signals: a sociological study of market competition. Princeton University Press, Princeton Powell WW, White DR, Koput KW, Oven-Smith J (2005) Network dynamics and field evolution: the growth of interorganizsational collaboration in the life sciences. Am J Sociol 110(4): 1132–1205

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Richter N, Thomas S, (2007) Perspektiven dezentraler Infrastrukturen im Spannungsfeld von Wettbewerb, Klimaschutz und Qualit€at. Interim report of the INFRAFUTUR project, Wuppertal Truffer B, Bauknecht D, J€ager T, (2004) Die Wandlungsdimensionen als zentrale Beschreibungsfaktoren k€unftiger Entwicklungspotenziale von Versorgungssektoren. Report of the joint project “Integrierte Mikrosysteme der Versorgung” im Rahmen des F€orderschwerpunktes “Sozial-€o kologische Forschung” http://www.sozial-oekologische-forschung.org/_media/MikrosystemeReport_Wandlungsdimensionen.pdf Vera A (2005) Strategische Allianzen im deutschen Krankenhauswesen. Z €offentliche gemeinwirtschaftliche Unternehmen 28:141–159 Wald A, Jansen D (2007) Netzwerke. In: Benz A, L€ utz S, Schimank U, Simonis G (eds) Handbuch governance. Wiesbaden, VS-Verlag, pp 93–105 Zenger T, Hesterly W (1997) The disaggregation of corporations: selective intervention, highpowered incentives, and molecular units. Organ Sci 8:209–222

Governance Variety in the Energy Service Contracting Market Katrin Ostertag and Friederike H€ ulsmann

1 Introduction1 Energy service contracting is an organisational innovation for the supply of useful energy, e.g. of heat instead of gas. There is a high variety of actors involved in the supply of contracting arrangements, including e.g. specialised contracting firms as well as equipment manufacturers. This variety is surprising, because we would expect that seemingly homogeneous transactions are supplied under similar governance structures (Me´nard 1996; Me´nard and Saussier 2000). Instead, we find a rather segmented market with characteristic specialisation patterns between different contractors. This paper investigates possible explanations of the variety of actors and the specialisation patterns with a particular focus on the role of municipal utilities. Transaction cost economics is used as the theoretical framework for the analysis as presented in Sect. 2. It is the basis for formulating propositions to be tested in an econometric analysis. The empirical part of the paper starts in Sect. 3 with a descriptive analysis of the specialisation patterns observed and some more information about the data used. Subsequently, Sect. 4 explains the specification of our econometric estimation model for the choice of the appropriate contractor and presents the estimation results. In the conclusions, we discuss implications for the further development of the energy service contracting market.

1 Earlier versions of this paper were presented at the DIME Workshop “The Changing Governance of Network Industries”, Naples, 29–30 April 2010, at the 1st DIME Scientific Conference “Knowledge in space and time: economic and policy implications of the knowledge-based economy” in Strasbourg, 7–9 April 2008 and at the 9th IAEE European Energy Conference “Energy Markets and Sustainability in a Larger Europe” in Florence, 10–13 June 2007.

K. Ostertag (*) Fraunhofer Institute for Systems and Innovation Research, Breslauer Str. 48 Karlsruhe, Germany F. H€ulsmann Mobil. Tum, Arcisstr. 21, 80333, M€ unchen D. Jansen et al. (eds.), Sustainability Innovations in the Electricity Sector, Sustainability and Innovation, DOI 10.1007/978-3-7908-2730-9_3, # Springer-Verlag Berlin Heidelberg 2012

41

42

K. Ostertag and F. H€ulsmann

2 Theoretical Background and Propositions Following Williamson, transaction cost economics focuses on the identification of a governance structure (or set of institutions and contracts) with incentive and adaptive characteristics, which minimises total costs (Saussier 2000b; Williamson 1985). In our research context, the different contractor types can be considered as specific governance structures for delivering the diffusion of contracting and of combined heat and power (CHP) plants. Transaction cost economics provides hypotheses, why one of the contractor types, e.g. municipal utilities, might be a superior or inferior governance structure in the contracting market. Which governance structure will be optimal depends on the prevailing determinants of the transaction costs. Three determinants of transaction costs are commonly distinguished: asset specificity, frequency and uncertainty. We expect these determinants – and consequently the optimal governance structure – to differ between the contracting projects. Asset specificity represents the most intensely studied determinant and applies to “. . .durable investments that are undertaken in support of particular transactions, the opportunity cost of which investments is much lower in best alternative uses or by alternative users should the original transaction be prematurely terminated” (Williamson 1985: 55). It gives rise to appropriable quasi rents, i.e. the difference between the value of the asset in the transaction-specific use and the second-best use (Perry 1989). If asset specificity and quasi rents are high, transaction cost economics expects the exchange of goods to be governed by integrated governance modes designed to limit the hold-up risk and to avoid renegotiations (Saussier 2000a). Different types of asset specificity are distinguished in the literature (Shelanski and Klein 1995; Williamson 1983). Site specificity concerns investments that allow the exploitation of a “cheek-by-jowl” relation. Physical asset specificity refers to relationship-specific equipment. It is large e.g. if an energy production plant is specifically tailored to the energy demand profile of a customer and immobile once installed and lower if the plant is mobile and suits the needs of other customers as well. Human asset specificity concerns transaction-specific knowledge created mostly by learning-by-doing. With respect to this determinant, municipal utilities may derive a competitive advantage relative to other contractors, because they have the data about the detailed energy consumption profile of their clients. Finally, dedicated assets refer to capacity expansions which are realised with a view to serving one specific client and which result in significant excess capacity if the transaction is terminated prematurely. They are an issue e.g. when it comes to the planning of electricity generation capacity. The determinant of frequency originally draws on the notion of decreasing average costs but can also be linked to the development of competences through repetition and learning. Higher levels of transaction frequency provide incentives for internal organisation, because this mode makes it easier to implement specialised (transaction cost saving) governance structures (Williamson 1985). Concerning uncertainty, the theory’s proposition is that, in the presence of high asset specificity, uncertainty will increase the probability for vertical integration. However, our data do not allow a further analysis of the latter two determinants.

Governance Variety in the Energy Service Contracting Market

43

We further need to specify the features of the competing governance structures. Two principal approaches have been followed in transaction cost economics, focusing on the degree of integration (Me´nard and Saussier 2000) and on the completeness of the underlying contracts (Saussier 2000a) respectively. We follow the first approach. The analysis of the transaction cost determinants on the one hand and of the features of the competing governance structures on the other hand should allow us to identify competitive advantages of certain governance structures. To conclude, we put up the propositions below. These which will be put into more concrete terms after having specified our variables (see Sect. 4.3). Proposition 1: If physical asset specificity (and site specificity) is high, an integrated form of governance is preferred. Proposition 2: If human asset specificity is high an integrated form of governance is preferred.

3 Description of Data and Specialisation Patterns The econometric analysis is based on a representative sample of 2475 contracting projects in Germany, i.e. projects of supplying heat, taken from a database that is entertained by a professional association of contractors (the “Verband f€ur W€armelieferung”). In the year 2000 there were 480 contractors active in the contracting market, mainly in heat supply (E&M 2000). The database used in this study covers 149 contractors, i.e. around a third of all contractors in Germany. The projects were mainly initiated in a period from the 1990s, when the association was founded, until 2005. It provides data about the installed capacity in terms of thermal and electric power, the type of building served, the technology (boiler of combined heat and power), the fuel type and the number of completed projects by the contractor. A client who is interested in contracting is confronted with a highly diversified market of suppliers. The alternatives comprise four types of contractors that are “specialized contractors”, “municipal utilities”, “real estate enterprises” and “other contracting actors” with a smaller market share including equipment manufacturers, consulting engineers, producers of measurement and control technology, as well as plumbers and engineers specialised in heating, ventilation and air conditioning systems. Figure 1 shows the share of each contractor type in the total number of contracts. Specialised contracting firms are the most important group, followed by municipal utilities and other contracting actors. This may be surprising, as other contracting actors are much more numerous than the other contractor types (almost 50% of all contractors in our data base). However, they realise a considerably smaller number of contracts each when compared e.g. to specialised contractors (5 vs. 28 contracts per contractor on average). The real estate enterprises are mostly daughter firms of housing companies, of whom many belong to the public domain.

44

K. Ostertag and F. H€ulsmann 13% Specialised contracting firms

8%

Municipal utilities

60%

19%

Real estate enterprises Other contracting actors

Fig. 1 Share of each type of contractor in the total number of projects Private housing

18.1

Public housing Office buildings

0.9 44.7 12.0

School Hospital Other public buildings Commerce

6.2 1.2

Industry 3.3

2.1

11.6

Other project types

Fig. 2 Building types Table 1 Specialisation patterns among contractors Building types Contracting actors Specialised contracting firms Municipal utilities Real estate enterprises Other contracting actors Total Pearson chi2(3) ¼ 139.3676, Pr

Public buildings (%) 21.16 57.94 29.95 29.29 28.14 ¼ 0.000

Private buildings (%) 78.84 42.06 70.05 70.71 71.86

Total (%) 100.00 100.00 100.00 100.00 100.00

Figure 2 depicts the different building types served. These can be divided into public buildings, including public housing, schools, hospitals, and other public buildings, on the one side, and private buildings. i.e. private housing, commerce and industry, on the other side. Office buildings may be private or public. Table 1 shows a cross tabulation between contractors and the type of building, which allows for a first overview of the specialization patterns in the contracting

Governance Variety in the Energy Service Contracting Market

45

market. The results of a simple test for independence, the Pearson’s chi-square test,2 suggest that contractors and building type are not independent. This is reflected by the chi-square probability of 0.000 which supports dependence between contractors and project types. In particular, the share of public building projects in the portfolio of municipal utilities (58%) is significantly above the total share of public buildings (28%). By contrast, specialised contracting firms are considerably less engaged in public building projects than average.

4 Econometric Model of Specialisation Patterns In order to test the propositions deduced in the theoretical part of the analysis, a multinomial logistic model3 is applied to assess the determinants relevant for the choice of the governance structures in the contracting market. For the regression analysis, contracts are taken as observations. The number of observations of the original database that contain enough information for the estimation process is 1048. For example, contracts that are classified by “Others” and “industry” with respect to building type served are not included into the regression analysis because the database doesn’t provide detailed information about them.

4.1

Contractor Choice as the Dependent Variable

As mentioned above, in this study, a contracting project can be carried out by four different types of actors. For municipal utilities, real estate enterprises and other contracting actors, such as equipment manufacturers, contracting represents a downward integrated business segment in the value-added chain. With respect to our propositions we, therefore, consider the choice of those contractors as a choice of a more integrated governance structure. By contrast, specialized contractors are exclusively engaged in contracting projects. We interpret them as a governance structure close to the market. In the multinomial logistic regression, specialised contractors are used as the comparison group. They are selected as the “base outcome” in order to be able to compare the logistic coefficients and relative risk ratios of the regression.

2 A chi-square probability of 0.05 or less is commonly interpreted by social scientists as justification for rejecting the null hypothesis that the row variable is unrelated – that is, only randomly related - to the column variable (http://www2.chass.ncsu.edu/garson/pa765/chisq.htm, 19.02.2007) 3 This model is generally suitable for analysing the relationship between a categorical outcome and the independent variables.

46

4.2

K. Ostertag and F. H€ulsmann

Independent Variables Determining the Choice of Governance Structure

In our model, the choice of contract with municipal utilities, specialized contracting firms, real estate enterprises or other contracting actors depends on physical and human asset specificity of the underlying investment. In order to test which one of the four categories of contractors are preferred as determinants vary, these exogenous variables are operationalised by dummies and continuous variables as follows.

4.2.1

Physical Asset Specificity and Site Specificity of Investment

Physical asset specificity is measured in two ways using a dummy as well as a continuous variable. The data distinguish between different types of plants implemented in a heat service contract – i.e. boilers or combined heat and power (CHP) plants, or a combination of both.4 When installing a CHP plant, a certain knowledge about the site is necessary, for example the amount of energy used, the profile of heat demand throughout the year and the ratio of electricity and heat demand. This information is the basis for a client-specific technical concept, which is highly tailor-made to match those conditions. As a result, its value is very low for transactions with other clients (Ostertag 2003). We, therefore, argue that CHP plants represent a higher degree of physical asset specificity than boilers. In addition, site specificity of CHP plants is higher than for boilers. As heat and power are a result of co-production and efficiency is largest in the case of on-site consumption, the implementation of CHP is most successful, when all “cheek-by-jowl” situation can be exploited. According to transaction cost theory this asset specificity of CHP favours integrated forms of governance to ensure the investment rents for the contracting parties. The data provide a dummy variable on CHP which takes the value one if CHP is established in the contracting project and zero otherwise. The volume of investment is another indicator for physical asset specificity of investments. It is measured as a continuous variable and can be interpreted as the scale of the project. For larger investments an integrated form of governance should be preferred in the contracting market. As there is no data available on investment in contracting projects in monetary terms, installed capacity in terms of thermal and electric power serves as a starting point. This is weighted to reflect plant specific average investment costs per kilowatt. The resulting variable SIZE is a proxy without dimension, which reflects the absolute monetary investment volume.

4

A common technical solution is that the CHP plant provides heat at a low temperature level that can be used all the year through, e. g. for supplying warm water. An additional central heating boiler is installed to provide additional energy during cold days.

Governance Variety in the Energy Service Contracting Market

4.2.2

47

Human Asset Specificity

There are two variables that measure human asset specificity. Firstly, the variable ‘TYPE OF BUILDING’ draws a link between contractors and clients or buildings respectively who are close to or belong to the public domain. This proximity hints to established relations between contractor and client which can serve as a “human asset” of particular value for exchanges between the two parties concerned. For example, municipal utilities are expected to be primarily specialized on contracting projects in public buildings as there exists an acquaintanceship between the trading partners if they are both in the public domain. There may be an overlap between the owners of the municipal utility and of the public building, for example a school. As there is data on several types of buildings including private housing, social housing, commerce, industry, schools, hospitals and other public buildings, the effects of an established relation on specialization patterns concerning the trading partner can be deduced. The information mentioned above is included into the regression equation as separate dummy variables for each type of building.5 In order to improve the estimation results, schools and hospital are combined as a dummy because they depict a small number of observations and are mostly public buildings. Secondly, human asset specificity can be depicted by an information advantage of municipal utilities concerning their customers if they do not only own the electricity but also the gas grid. In this survey, they mostly do. In order to control for this advance of knowledge about gas consumption and hence heat demand, the dummy variable GAS as a type of fuel is integrated into the regression equation. It takes the value one if the project is supplied with gas and zero otherwise. According to proposition two integrated governance modes like municipal utilities are the preferred choice if gas is used for supplying heat.

4.3

Summary of Model Specifications

A summary of all exogenous variables and their characteristics is given in Table 2. On the basis of the variable specifications, we can now also formulate our propositions more concretely. With the information above in mind they now become: Proposition 1: If physical asset specificity is high an integrated form of governance is preferred. This means that municipal utilities, real estate enterprises and other contractors are more likely to be chosen than specialised contractors • If CHP is implemented in the contract (Proposition 1a). • If project investments as measured by the variable SIZE increase (Proposition 1b).

5

Office buildings are omitted to avoid multicollinearity.

48

K. Ostertag and F. H€ulsmann

Table 2 Descriptive statistics for the influencing variables Variables Description CHP Type of plant: 1 ¼ combined heat and power(CHP); 0 ¼ otherwise SIZE Investment volume index Type of building PRIVHOUSE PUBHOUSE SCH/HOSP OTHERPUB OFFBUILD COMMERCE GAS FREQ

1 ¼ private housing; 0 ¼ otherwise 1 ¼ public housing; 0 ¼ otherwise 1 ¼ school or hospital; 0 ¼ otherwise 1 ¼ other public facilities/buildings; 0 ¼ otherwise 1 ¼ office building; 0 ¼ otherwise 1 ¼ commercial building; 0 ¼ otherwise type of fuel: 1 ¼ gas; 0 ¼ otherwise frequency – number of signed contracts of a contractor

Min

Mean

Median Max

0 0.057

0.023 0.533

0 0.16

1 72

0 0 0

0.552 0.143 0.055

1 0 0

1 1 1

0 0 0

0.077 0.0264 0.148

0 0 0

1 1 1

0

0.668

1

1

1

65.686

27

377

Proposition 2: If human asset specificity is high an integrated form of governance is preferred. I.e. • If there are previously established relations reflected in the building being connected to the gas grid, municipal utilities should be more likely to be chosen than specialised contractors (Proposition 2a). • In addition, municipal utilities and real estate enterprises should be more likely to be chosen for projects in public buildings than specialised contractors, because they are close to or belong to the public domain themselves (Proposition 2b).

4.4

Results

For the interpretation of the regression results we refer to relative risk ratios instead of the logistic coefficients.6 The advantage of these ratios is that they not only indicate the direction but also the level of the different effects.7 A relative risk equal to 1 implies that the event is equally probable in both the base group and the group considered. A relative risk greater than 1 implies that the event is less likely in the base group. A relative risk less than 1 implies that the event is more likely in the base group. The regression results in terms of relative risk ratios are summarised in Table 3.8

6

The logistic coefficients of the regression results depicting directions, positive or negative, of the different effects on contract choice are presented in Appendix 2, Table A. 7 For their mathematical definition see Appendix 1. 8 Base outcome: specialised contractors; Reference group for type of building (that is not included because of collinearity): commerce. For more statistical details see Appendix 2, Table B.

Governance Variety in the Energy Service Contracting Market

49

Table 3 Relative risk ratios of the multinomial logistic regression Relative risk ratios Independent variables Municipal utilities Real estate enterprises Other contracting actors CHP 3.998896*** 14.39358*** .275928* SIZE .9491102 .0114238*** .5882531*** GAS 1.775419 (**) .2311688*** .8712537 Type of building PRIVHOUSE .5350042(*) 1.750376 .2775838*** PUBHOUSE 3.397786** 9.599283*** .3447437*** OFFBUILD 2.313218 1.439309 1.353613 SCH/HOSP 3.495117** .9288619 .651995 OTHERPUB 5.252138*** 2.233624 1.812104(*) Log likelihood ¼ 961.55457, Pseudo R2 ¼ 0.1190 Number of obs ¼ 1,048, LR chi2(24) ¼ 259.7,2 Prob > chi2 ¼ 0.0000 *** Significant at a 1% level, ** Significant at a 5% level, * Significant at a 10% level, ( **) Significant at a 15% level, (*) Significant at a 20% level

Regarding the effect of physical asset specificity on governance structures as measured by CHP, municipal utilities and real estate enterprises show significant relative risk ratios above unity. This confirms Proposition (1a) that integrated forms of governance are preferred to market oriented structures if physical asset specificity is high. For CHP- relative to non-CHP-projects, the chance for municipal utilities to win a contract against a competing specialized contractor would be expected to increase by a factor of 4 given the other variables in the model are held constant. For real estate enterprises compared to specialized contractors this factor is even higher, whereas the probability of being engaged in such a contracting project is lower for other contracting actors such as equipment manufacturers and consulting engineers compared to specialized contractors. Another variable that implies physical asset specificity is SIZE. It shows a significant negative effect (i.e. relative risk rations below unity) for other contracting actors and real estate enterprises relative to specialized contractors as the dimension of the project increases. Thus, given a one unit increase in SIZE, the relative risk of real estate enterprises being engaged in a contracting project would decrease. If the size of the project increases contracting is expected to be done by specialized contractors rather than real estate enterprises or other contracting actors. For municipal utilities relative to specialized contractors no statement can be made because the relative risk ratio is not significant. However, the results suggest that Proposition (1b) is not supported because specialized contractors as suppliers of a market oriented service seem to be more likely as investments increase. A reason for the undetermined effect of SIZE for municipalities, that is expected to be significantly positive according to theory, might be partially due to tighter budget restrictions for municipal utilities compared to private actors. Me´nard and Saussier (2000) argue, that such constraints can lead to the choice of a governance mode less well suited to the transaction.

50

K. Ostertag and F. H€ulsmann

Regarding Proposition (2a) on human asset specificity and the effect of an information advantage for municipal utilities reflected by the dummy variable GAS, a strong conclusion cannot be drawn because the estimated effect for municipal utilities is only significant at the 15% level. But the logistic coefficients exhibit the expected positive sign.9 Therefore, the relative risk ratio of choosing a municipal utility against a specialized contractor, if the fuel is gas, indicates an advantage of municipal utilities because they mostly own the gas distribution system. Proposition (2b) on human asset specificity which emphasizes an advantage of contractors with previously established relations is again supported by the data. The relative risk (or chance) of obtaining a contracting project is higher for municipal utilities than for specialized contractors if the type of building is a public rather than a private building. This is indicated by their relative risk ratios above unity for public housing (PUBHOUSE) and other public buildings (OTHERPUB). Looking at real estate enterprises, the high and highly significant relative risk ratio for public housing buildings catches the eye. This indicates a strong advantage for (public) real estate companies or their daughter companies in obtaining contracting projects for public housing compared to specialised contractors. The overall picture for this proposition with respect to the real estate industry, however, is mixed. The core business of the real estate industry suggests that rather than proximity in terms of public versus private domain actors the sectoral proximity of public and private housing may create an advantage for real estate enterprises in public and probably private housing as well. In conclusion, Proposition (2b) is only confirmed for municipal utilities, whereas the picture is mixed for real estate enterprises.

5 Conclusions Our estimation results provide evidence that governance modes vary in their suitability to govern the range of different contracting projects considered. Some modes are superior to others largely following our propositions based on transaction cost economics. The main propositions that concern asset specificity of investment (Propositions 1a, 2a and 2b) are supported by the data. If physical, site and human asset specificity are high, governance modes are preferred, for which contracting represents a downward integration of business activities along the value-added chain. This includes the supply of contracting by municipal utilities, real estate enterprises and our group of “other contracting actors”, for example equipment manufacturers. More specifically, as theory would suggest municipal utilities indeed turn out to be superior suppliers of contracting if CHP is implemented, if the building is connected to their gas grid and if it is a public building. This pattern could orient the development of this business activity for utilities reconsidering their strategic position following the liberalisation of the electricity market.

9

See Appendix 2, Table A.

Governance Variety in the Energy Service Contracting Market

51

With regard to the size of investment, the empirical results show specialised contractors to be the preferred suppliers as project size increases. This is opposed to our proposition according to which size as a measure of physical asset specificity should foster more integrated governance structures. Further empirical research should examine, whether this result reflects a mismatch in governance structures that should be amended and what causes this mismatch to occur. Financial constraints could be a possible explanation. Acknowledgements This paper is an outcome of the research project “Diffusion of innovations in energy efficiency and in climate change mitigation in the public and private sector”. We wish to thank the Volkswagen Foundation for the financial support of this project, the Verband f€ur W€armelieferung for the data provided and our colleagues Krisztina Kis-Katos and Joachim Schleich for helpful comments on earlier versions of this paper. The authors are solely responsible for remaining mistakes and weaknesses.

Appendix A.1

Applying a Multinomial Logistic Model

For each outcome (y) a set of coefficients, b1 (specialized contractors), b2 (municipal utilities), b3 (real estate enterprises) and b4 (equipment manufactures and consulting engineers) is estimated. Probability of y ¼ 1 (specialized contractor): 1

Pr(y ¼ 1Þ ¼

eXb

1

eXb 2 3 4 þ eXb þ eXb þ eXb

Probability of y ¼ 2 (municipal utility):

Pr(y¼ 2Þ ¼

eXb 1

2

2

3

4

3

4

eXb þ eXb þ eXb þ eXb

Probability of y ¼ 3 (real estate enterprises):

Pr(y¼ 3Þ ¼

eXb 1

2

3

eXb þ eXb þ eXb þ eXb

52

K. Ostertag and F. H€ulsmann

Probability of y ¼ 4 (others): Pr(y¼ 4Þ ¼

eXb 1

4

2

3

eXb þ eXb þ eXb þ eXb

4

In order to identify the model b1 is set to zero. Therefore, the other coefficients will measure the change relative to the base outcome, specialized contractor. Pr(y¼ 1Þ ¼

Pr(y¼ 2Þ ¼

Pr(y¼ 3Þ ¼

Pr(y¼ 4Þ ¼

1 1 þ eXb

ð2Þ

þ eXb eXb

1 þ eXb

ð2Þ

1 þ eXb

ð2Þ

1 þ eXb

ð2Þ

ð4Þ

ð3Þ

þ eXb

ð4Þ

ð3Þ

þ eXb

ð4Þ

ð3Þ

þ eXb

ð4Þ

ð3Þ

þ eXb eXb

þ eXb

ð2Þ

þ eXb eXb

ð3Þ

ð4Þ

þ eXb

In order to detect the strength of the coefficient’s effect, relative risk ratios can be applied. The risk of choosing a municipal utility relative to choosing a specialized contractor is the relative probability of y ¼ 2 to the base outcome: Prðy¼ 2Þ Xb 2 ¼e Pr(y¼ 1Þ The ratio of the relative risk for a one-unit change in xi, e.g. in size, is then 2 b1 2 x1 þ þ bk 2 xk ¼ eb1 2 2 b1 x1 þ þ bk xk

Thus the exponential value of a coefficient is the relative-risk ratio for a one-unit change in the corresponding variable.10 Relative risk ratios represent the risk of choosing a municipal utility as a contractor relative to choosing a specialized contractor for each one-unit change in, for example, the SIZE or FREQ measure, holding all other variables constant.

10

Stata Base Reference Manual (2005), p. 211

Governance Variety in the Energy Service Contracting Market

53

A.2 Regression Results for a Multinomial Logistic Model of Contract Choice Table A Logistic coefficients Coeff Municipal utilities SIZE .0522304 CHP 1.386018 GAS .5740362 PRIVHOUSE .6254806 PUBHOUSE 1.223124 OFFBUILD .8386398 SCH/HOSP 1.251367 OTHERPUB 1.658635 CONSTANT 2.656903 Other contracting actors SIZE .5305979 CHP 1.287615 GAS .137822 PRIVHOUSE 1.281632 PUBHOUSE 1.064954 OFFBUILD .3027772 SCH/HOSP .4277184 OTHERPUB .5944884 CONSTANT .0133551

z

P > │z│

[95% conf. interval]

.1129242 .4279406 .3579361 .4672805 .4948239 .7218282 .5552807 .5797968 .5272346

0.46 3.24 1.60 1.34 2.47 1.16 2.25 2.86 5.04

0.644 0.001 0.109 0.181 0.013 0.245 0.024 0.004 0.000

.2735578 .169097 .5472703 2.224767 .1275057 1.275578 1.541334 .2903724 .253287 2.192961 .5761175 2.253397 .1630367 2.339697 .5222544 2.795016 3.690264 1.623542

.1682704 .7747396 .2170717 .2592133 .3726769 .4783676 .4425889 .4502139 .2886512

3.15 1.66 0.63 4.94 2.86 0.63 0.97 1.32 0.05

0.002 0.097 0.525 0.000 0.004 0.527 0.334 0.187 0.963

.8604019 2.806077 .5632748 1.789681 1.795387 .634806 1.295177 .2879146 .5523907

0.000 0.000 0.000 0.339 0.000 0.716 0.951 0.420 0.144

6.386582 2.557537 1.72287 3.610695 1.975624 .9535905 .5884288 1.70809 1.062057 3.46132 1.600244 2.32857 2.411596 2.264006 1.151037 2.758287 2.101862 .3055458

Std. Err.

Real estate enterprises 4.472059 .9768152 4.58 SIZE CHP 2.666782 .481597 5.54 GAS 1.464607 .2607276 5.62 PRIVHOUSE .5598305 .5858574 0.96 PUBHOUSE 2.261688 .612068 3.70 OFFBUILD .3641632 1.002267 0.36 SCH/HOSP .0737952 1.192777 0.06 OTHERPUB .8036254 .9972948 0.81 CONSTANT .8981582 .614146 1.46 Number of obs ¼ 1048 LR chi2(24) ¼ 259.72, Prob > chi2 ¼ 0.0000 Log likelihood ¼ 961.55457, Pseudo R2 ¼ 0.1190

.2007939 .2308462 .2876308 .7735837 .3345206 1.24036 .43974 1.476891 .579101

54

K. Ostertag and F. H€ulsmann

Table B Relative risk ratios RRR Municipal utilities SIZE .9491102 CHP 3.998896 GAS 1.775419 PRIVHOUSE .5350042 PUBHOUSE 3.397786 OFFBUILD 2.313218 SCH/HOSP 3.495117 OTHERPUB 5.252138 Real estate enterprises SIZE .0114238 CHP 14.39358 GAS .2311688 PRIVHOUSE 1.750376 PUBHOUSE 9.599283 OFFBUILD 1.439309 SCH/HOSP .9288619 OTHERPUB 2.233624

Std. Err.

z

[95% conf. P > │z│ interval]

.1071775 0.46 1.71129 3.24 .6354864 1.60 .2499971 1.34 1.681306 2.47 1.669746 1.16 1.940771 2.25 3.045173 2.86

0.644 0.001 0.109 0.181 0.013 0.245 0.024 0.004

.7606684 1.728528 .8802884 .2140954 1.288253 .5620764 1.17708 1.685824

1.184235 9.251323 3.580771 1.336925 8.961711 9.520021 10.37809 16.36289

.0111589 4.58 6.931905 5.54 .0602721 5.62 1.025471 0.96 5.875414 3.70 1.442572 0.36 1.107926 0.06 2.227582 0.81

0.000 0.000 0.000 0.339 0.000 0.716 0.951 0.420

.001684 5.600577 .1386748 .5551989 2.892315 .2018473 .0896721 .3163087

.0774954 36.99176 .3853549 5.518411 31.85899 10.26326 9.621553 15.77281

0.002 0.097 0.525 0.000 0.004 0.527 0.334 0.187

.422992 .0604416 .5693415 .1670134 .1660631 .5300383 .2738494 .7498256

.818081 1.259666 1.333265 .4613568 .7156811 3.456859 1.552304 4.379311

Other contracting actors SIZE .5882531 .0989856 3.15 CHP .275928 .2137723 1.66 GAS .8712537 .1891246 0.63 PRIVHOUSE .2775838 .0719534 4.94 PUBHOUSE .3447437 .128478 2.86 OFFBUILD 1.353613 .6475245 0.63 SCH/HOSP .651995 .2885658 0.97 OTHERPUB 1.812104 .8158342 1.32 Number of obs ¼ 1048 LR chi2(24) ¼ 259.72, Prob > chi2 ¼ 0.0000 Log likelihood ¼ 961.55457, Pseudo R2 ¼ 0.1190

References E&M (Energie&Management) (2000) Contracting bleibt ein Wachstumsmarkt. In: Energie & Management, No. 7/2000 dated 01.04.2000 Me´nard C (1996) Of clusters, hybrids and other strange forms – The case of the French poultry industry. In: Journal of Institutional and Theoretical Economics, 152 (March), pp. 154–183 Me´nard C, Saussier S (2000) Contractual choice and performance: the case of water supply in France. Rev. ’E´conomie Ind 92(2/3):385–404 Ostertag K (2003) No-regret potentials in energy conservation: an analysis of their relevance, size and determinants. Heidelberg (Physica-Verlag), Technology, Innovation and policy, series of the Fraunhofer ISI, vol 15 Perry MK (1989) Vertical integration: determinants and effects. In: Schmalensee R, Willig RD (eds) Handbook of industrial organization, vol 1. Elsevier, Amsterdam, pp 183–260

Governance Variety in the Energy Service Contracting Market

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Saussier S (2000a) Transaction costs and contractual incompleteness: the case of E´lectricite´ de France. J Econ Behav Organ 42(2):189–206 Saussier S (2000b) When incomplete contract theory meets transaction cost economics: a test. In: Me´nard C (ed) Institutions, contracts and organisations. Perspectives from new institutional economics. Edward Elgar, Cheltenham, pp 376–398 Shelanski HA, Klein PG (1995) Empirical research in transaction cost economics: a review and assessment. J Law Econ Organisation 11(2):335–361 Stata Base Reference Manual (2005), -Release 9, Stata Press, vol 2, K-Q Williamson OE (1983) Credible commitments: using hostages to support exchange. Am Econ Rev 73(4):519–540 Williamson OE (1985) The economic institutions of capitalism. Free Press, New York

.

Shareholding and Cooperation Among Local Utilities: Driving Factors and Effects Dorothea Jansen and Richard Heidler

1 Introduction This paper explores the determinants and effects of the shareholding structure in the German electricity sector. The rationale behind it is the role of shareholdings for the increase or blocking of competition in the energy market (Sects. 2 and 3) and their relation to formal interlocking within the municipal sector at a horizontal level. As Bontrup and Marquardt (2010: pp. 92–93, 353) state, it is essential for the creation of a competitive energy market to strengthen alliances of smaller energy generating, mostly municipal utilities, in order to install contestable markets in the up- and downstream business field (also c.f. Frenzel 2007 and Bundeskartellamt 2011a: p. 21, 2011b: pp. 288–291). Contrary to the assessment by the Advisory Antitrust Board (c.f. Monopolkommission 2009: p. 17, art. 67) we hold that alliances and joint companies within the municipal sector such as the acquisition of the Th€uga and the STEAG by consortia of local utilities, as well as joint companies in electricity generation such as 8KU, S€udweststrom and Trianel (c.f. Bontrup and Marquardt 2010: pp. 84–92 and Sect. 4) will be essential to implement a competitive energy market. We focus on two aspects here. First we deal with the collaboration pattern of local utilities, larger regional and the four large national suppliers, as well as with other municipal shareholders, municipal companies and energy related companies either outsourced by a local utility or by an alliance of local utilities (Sect. 4.1). Within the municipal sector we look for the potential of horizontal interlocking among local utilities. We find that the large and medium sized utilities hold shares in other large or medium sized utilities as well as in subsidiaries outsourced for energy related

D. Jansen (*) German University of Administrative Sciences and German Research Institute for Public Administration, Freiherr-vom-Stein-Strabe 2, 67346, Speyer, Germany R. Heidler University of Wuppertal, Gaubstrabe 20, 42097, Wuppertal, Germany D. Jansen et al. (eds.), Sustainability Innovations in the Electricity Sector, Sustainability and Innovation, DOI 10.1007/978-3-7908-2730-9_4, # Springer-Verlag Berlin Heidelberg 2012

57

58

D. Jansen and R. Heidler

business fields or joint companies established by an alliance of local utilities. We find that linkages typically follow two patterns. First, utilities from the same region have a higher probability of being linked by either shares or joint companies. Second, while linkages by joint companies typically connect medium sized utilities of similar size, shares typically go from larger utilities to smaller, but still medium sized ones. Overall, we find that almost half of the local utilities are interconnected (Sect. 4.2). In Sect. 5 we combine network data and results with data on collaboration and generation strategies collected by the utility questionnaire (c.f. Jansen, Chapter in this volume). We find a strong correlation between more or less formalised horizontal collaboration and horizontal linkages by shareholding and joint companies. In addition, we ask for the effects of horizontal linkages on dependence on vertical collaborations with the large national providers and the regional providers .There is evidence that particularly engagement in joint companies, but also investing shares in other local utilities tend to decrease the probability of vertical collaboration with the regional suppliers (Sect. 5.1). Next we deal with effects of private shareholdings and horizontal interlockings between local utilities on the engagement of local utilities in energy generation, particularly in innovative climate friendly technologies such as Renewables (RES) and micro CHP (Combined Heat and Power). While private shareholdings typically lower the chances for an engagement in generation, joint companies and horizontal shareholdings further the probability of an engagement in innovative generation technologies. Both strategies therefore can be recommended to foster the competitiveness of municipal utilities (Sect. 5.2). Sect. 6 concludes.

2 Structure of the German Energy Sector, De- and Re-regulation and Interlocking The German electricity market has undergone a large restructuring since the beginning of the 1990s. At the national and regional level an intensive process of mergers and acquisitions took place, leading to an even higher market concentration. The number of transmission network operators decreased from 9 to 4. Many regional distributors were integrated into the large suppliers. Bontrup and Marquardt (2010:76ff) report on the basis of data from the German Federal Statistics Office that the number of utilities in electricity decreased from 1998 to 2006 by 20% – from 1,229 to 919. Schiffer (1991: p. 127; 2005: pp. 179, 183; 2008: pp. 210, 238, c.f. Table 1) reports an even lower number of approximate 800. Driven by EU legislation, the act on the regulation of energy markets (EnWG) was revised in 1998 and 2005, implementing 100% end user eligibility, free entry for electricity generation, and third party access to the grid. In addition, unbundling of transport and distribution networks and other business fields (generation, sales, distribution, services) was intensified for the large operators of the grid (<100.000 customers) by the implementation of legal and operational unbundling. With the abolishment

Shareholding and Cooperation Among Local Utilities

59

Table 1 Market concentration in the German electricity sector: number of firms 1992 2004 2007 Trends Transmission Network 9 4 4 Vertical Integration, Integration Operators (TNO) Electricity and Gas Regional Distributors (RNO)

82

60

60

Regional/Local cooperation & integration, consolidation

Private generation (hydro and wind power)

n.a.

50

50

Trend towards wind and biomass

Municipal/Local Distributors

>900

725

725

New Alliances in Generation, Grid, Services, Consolidation

New Actors in Generation, – 250 250 Foreign Investments, Market Services, Distribution Consolidation Sources: Schiffer 1991: 127; 2005: 179; 183; 2008: 210, 238 n.a. not available

of some EU directives concerning the gas markets and the Directive 2003/54/EG on common rules in the electricity market, the EnWG of 2005 was again amended in 2010. Nevertheless, the effectiveness of market-making regulation is still debated. Access to the grid is still a problem for power producers. Their applications for access of newly installed capacities often were turned down by the operators with the argument of an instable or overload system (Leprich 2005). Since the construction of power plants took less time than the upgrading of high voltage grids, a backlog of plants searching for access resulted. In 2007, the problem had been taken up by a standardisation of the application procedure for the access of new power plants (100 MWel) to the grid (110 kV). Yet, there is still a considerable demand not satisfied (Reichel 2008, also c.f. Deutsche Energie-Agentur 2011a, b). Another problem is the trend towards vertical integration, driven by the large national suppliers, foreign energy actors and investors. According to a report to the parliament by the German Federal Government (Monopolkommission 2007, Bundestagsdrucksache 16/7087, pp. 54–56, art. 166–173) by the Antitrust Board the four large national suppliers hold shares in 314 utilities at the regional and local level. Because of the risks of loss of independence of local utilities already in 2003 the federal antitrust agency changed to a strict policy of forbidding further acquisition of shares, even minority shares, and of mergers of local utilities for E.ON and RWE. The two firms were considered to constitute a duopoly in the electricity and gas market (Becker 2007: pp. 71–73). This decision was confirmed by the Federal Court of Justice (BGH) in 2008. In addition, several interlocks between RWE and E.ON may indicate an opportunity structure for collusion. In its sector report 2007 the Federal Antitrust Agency pointed to interlocking shares of the four TNOs not only in energy generation plants (n ¼ 11), but also in local utilities (n ¼ 25) with energy generation capacities (Monopolkommission 2007: pp. 54–56, art. 166–173). Interlocking shares in relevant actors at the local distribution level suggest that it may be quite easy and attractive for these actors to collude in distribution, too. This is suspected for the end-customer markets as well as for the intermediate markets

60

D. Jansen and R. Heidler

and the market for balancing electricity (Monopolkommission 2007: 16/7087, pp. 54–56, art. 166–173, Becker 2007: pp. 73–75). An official enquiry showed that the two firms made up for about 52% of electricity generation capacity in 2003 and 2004 in Germany. ENBW and Vattenfall account for further 30%. With respect to net energy generation concentration ratio, E.ON and RWE jointly made up for 57% (2003), respective 59% (2004). ENBW and Vattenfall held further 29 respective 30% of net generation. For 2007 the Federal Antitrust Agency reported that RWE and E.ON together hold 57% of net generation, EnBW accounts for further 5–15% and Vattenfall for 10–20% (Monopolkommission 2009:35f.). Also sales share of E.ON and RWE jointly were well above 40% (2003), respective 35% (2004). A study by Zimmer, Lang and Schwarz (2007) shows similar results for generation capacity (E.ON and REW both 26.5%, Vattenfall 16.9%, ENBW 10.3%). According to an enquiry by the Federal Network Agency in 2007, the four large national providers deliver 85.4% of the net bottleneck capacity and 87.9% of the net electricity generation (Bundesnetzagentur 2008: pp. 13, 69–70). Bontrup and Marquardt (2010: p. 82, Tab. 7) report for 2006 a concentration rate of 30.8% for the duopoly and of 46.7% for the four large national providers with respect to electricity sold to end customers in 2006. Albeit these data do not take into account for trading between the producers of electricity (c.f. Figures on first wholesale market concentration). An important role for the assessment of market dominance is in addition, that only the four large suppliers command a generation portfolio that allows to cover the complete merit order of generation capacities, particularly for the coverage of the base load. The concentration ratio for the large four companies in first sale wholesale market was around 60% (Monopolkommission 2007: p. 54). According to the latest Monitoring Report of the Federal Network Agency (Bundesnetzagentur 2010: p. 77) the concentration rate for bottleneck net generation in 2009 slightly decreased from 84.7% in 2008 to 79.3%. The net generation concentration ratio amounted to 83.1% with respect to electricity fed into the networks for general supply. The recent analysis of electricity generation and electricity wholesale markets by the Federal Antitrust Agency (Bundeskartellamt 2011b: pp. 94–114), triggered by the suspicion of deliberate reduction of generation capacity in 2007 and 2008, shows that the four large suppliers held 85% (2007) resp. 84% (2008) and 80% (2009) of total generation capacity and 86% resp. 84% and 82% of total of current entry (Bundeskartellamt 2011b: p. 7). By an econometric analysis (Pivotal Supplier Index and Residual Supply Index) they come to the conclusion that at least three of the suppliers hold a dominating position in the electricity first sale wholesale market (Bundeskartellamt 2011b: pp. 96–105). They collected data on the marginal costs and management of more than 340 power plants. They detected substantial deviations from an optimal use of the generation capacities of the four large suppliers and found that overall 0.34% of their capacities stood still despite being profitable (Bundeskartellamt 2011a: pp. 12.; Bundeskartellamt 2011b: pp. 148–155). But they were unable to find legally conclusive evidence for a collusive reduction of generation of base load capacities in order to change the merit order to the firms benefit. But the federal antitrust agency stresses that even

Shareholding and Cooperation Among Local Utilities

61

small reductions can make a large difference for the merit order and prices. The agency comes to the conclusion that the four large suppliers do have the opportunities to reduce capacities as well as large incentive to do so. In particular, they found that plants based on ignite or/and mineral coal showed large phases of standstill with respect to suppliers 1 and 3. Supplier 3 stands out for his important role of still stand in expensive residual technological capacities. In addition it stands out for its overall reduced capacity (0.25% of average capacity) (Bundeskartellamt 2011b: Table 19) while supplier 1 withheld 0.17% (Bundeskartellamt 2011b: Table 16). Supplier 4 (Bundeskartellamt 2011b: Table 20) exhibits substantial still stand only for ignite and is characterised by the smallest reduction of capacity (0.05% of average capacity). For case 2 they found in addition to a minor reduction of ignite and mineral coal capacities a large role of nuclear energy plants and a substantial role of expensive and price driving technologies (gas and steam and running watercraft (Laufwasserkraftwerk)). This supplier withheld 0.12% of its capacities (Bundeskartellamt 2011b: Table 17). Market competition particularly in the retail market is still quite low, although procedures for households changing the supplier were standardised and are prescribed and monitored by the Federal Network Agency now. Nevertheless, according to the monitoring report (Bundesnetzagentur 2007: p. 72), in 2006 only 2.3% of private households and small trade (<50 MWh p.a.) changed their supplier, while 13.5% of large customers/industry customers (>2 GWh p.a.) did. Although business intelligence studies predicted that the percentage of households ready to change would soon be up to 50%, by 2007, only 7% of the households had changed their supplier; further 3% did so because of moving. 37% changed to a cheaper tariff of the established supplier (VDEW 2007a,b). A study of the association of municipal companies (VKU 2008) confirms the low rate of change of the supplier (for customers of public utilities 5–7%). Thus the Federal Networks Agency complained on the low degree of customer driven competition in its reports (Bundesnetzagentur 2008: p. 84 and 2010: pp. 92–95). By 2009 only 2.1% of customers from trade and industry still had a standardised supply contract with the local utility; 49.3% had changed to another tariff, and 48.8% had changed to another supplier (Bundesnetzagentur 2010: pp. 92–95). Also the price differences between local suppliers and suppliers from other regions with respect to larger trade & industry customers and small trade customers – local suppliers underbid outside suppliers – are assessed as an indicator for an increase in competition in this market segment. Yet, 22% of respondents had changed to another tariff. Around 45% of household customers stayed in the general tariffs, 41% changed to another tariff; and around 14% indeed changed to a supplier from outside the local area.1

1 Simply adding the percentages of customer change since 2005 does not give a valid picture. The sum (2005: 2.22%, 2006: 2.55%, 2007: 4.34%; 2008 5.35%; 2009: 5.3%:¼19.6%) results in double counting of customers who changed suppliers more than once. Customers with a standard tariff of their local supplier tend to change to another tariff only (Bundesnetzagentur 2010: p. 98).

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3 Theory Framework, Research Questions and Design We start from the problem of competition in network sectors. De-regulation of the German energy sector builds on the concept of disaggregated regulation of the bottlenecks within the energy sector, characterised by high asset specificity/sunk cost and the specifics of natural monopolies (Knieps 1999, 2006; Brunekreeft 2003: 89ff.; Baumol et al. 1983; Demsetz 1968; Stiglitz 1987: p. 889). The idea is to develop – by the regulation of the networks – contestable markets (Baumol 1982; Knieps 2010) for energy generation, trade and (whole-) sale of energy and related services such as energy efficiency services and metering. Albeit, the large operators of the national grid are not only the ex national monopolies, they also dominate the generation capacities, the wholesale market and as is suspected by the EU Commission and others, they might even manipulate prices at the EEX (Bohne and Frenzel 2003; Frenzel 2007: Sect. 5, DeutscherBundestag 2009 16/12556; Deutscher 2008 16/11538, Bundeskartellamt 2011a, p. 2 and 2011b, pp. 120–122), or the legislative processes in the amendments of the German energy act (DeutscherBundestag 2006, 16/3727; Bundesrechnungshof 2008). Under these conditions vertical shareholding in municipal utilities might lead to constraints in competition, particularly with respect to the entry of local utilities into profitable electricity generation markets such as RES and micro-CHP. The large providers meanwhile are active in these markets (particularly in large wind energy parks). They are not interested in upgrading the grid (E.ON even sold its part of the grid) to the benefit of their competitors. On the other hand, local utilities often lack the economies of scale to enter into large energy generation projects. Albeit, coping with market liberalisation they increasingly took up new market opportunities such as RES and micro CHP. Large municipal utilities invest in joint energy generation capacities in collaboration with independent generation companies such as Trianel or S€udweststrom. They source out portfolio management and energy trade to joint service companies and established specialized units for energy services. The attractiveness of distributed generation is growing in regions with low density and high cost for infrastructure (ATKearny 2007b; Ernest and Young 2008; PWC 2008). We therefore see formal and informal collaboration within the local utility sector as the key to safeguard its independence and its competitiveness. To explain the potential of local utilities to engage in energy efficient/green generation technologies we build on theoretical concepts from actor centred institutionalism (Mayntz and Scharpf 1995) and sociological neo-institutionalism (Powell and DiMaggio 1991; Senge et al. 2006). These concepts are combined with approaches from network analysis and economic sociology (Powell 1996; Swedberg 2003; Podolny 2005; Jansen 2005; Krippner and Alvarez 2007) and theories of learning and innovation (Nelson and Winter 1982; Lundvall 2002; Carlsson et al. 2002; Siggelkow and Levinthal 2003). The focus is on innovation in the sense of diffusion of technical or social innovation into practice and into the market. Innovative decisions will have to be

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taken by first mover adopters of new technologies and business models. Slack resources and organisational devices for systematic and long-term search in times of change are discussed as preconditions of innovation (Jansen 1996; Cohen and Levinthal 1990). This ranges from customer relationship management and R&D to information networks and the search for collaboration partners and alliances. From a neo-institutionalism perspective, recipes of “rational practices” spread in organisational fields since organisations are following so-called “rational myths” (Meyer and Rowan 1991) promising legitimacy. These myths are enforced by institutions in the organisational field e.g., by business consultants or regulators. New market-correcting regulation sets incentives for carbon abatement and green technologies, in particular for RES and CHP by providing a temporary niche market (Negro and Hekkert 2008; He´ritier 2001; Kemp et al. 1998). In addition they diffuse by mimicry, since actors under conditions of uncertainty tend to copy other organisations following seemingly legitimate and rational business models (Powell and DiMaggio 1991). From a social network perspective several scholars pointed at the role of networks for the diffusion and adoption of innovations in time, space and degree of penetration. Thus, economic, structural and cultural factors and mechanisms shape the diffusion of knowledge, practices and technologies (Strang and Soule 1998; Borgatti and Cross 2003; Powell et al. 2005; Podolny 2005). From this reasoning we deduce the following hypotheses: 1. Size is an important factor enabling collaboration among local utilities. The larger and the more visible a firm the easier it will be to find investors or to establish networks for knowledge transfer or joint companies (Malerba 2002; Powell et al. 1996, 2005; Podolny 2005). 2. Horizontal shares among local utilities therefore typically go from larger utilities to medium sized ones, still attractive as an investment and a partner, while alliances for joint companies typically connect utilities of medium and similar sizes. Thus we expect a more asymmetric structure for the shareholding network and a more cliquish structure for the joint company network. 3. Horizontal informal collaboration is expected to lead to learning by doing and knowledge transfer, particularly in new technologies (c.f. Powell et al. 2005, 1996; Borgatti and Cross 2003; Haller and Reichel 2008). 4. Horizontal informal collaboration is expected to go together with more formal pooling of resources in the long run, thus furthering economies of scale and the build-up and transfer of implicit knowledge on new technologies (c.f. Powell et al. 1996). The literature on acquisitions and mergers provides ample evidence on the role of geographical proximity, shared values and joint understanding of tasks in producing trust and lowering transaction costs of collaboration (Wald and Jansen 2007; Owen-Smith and Powell 2004; Borgatti and Cross 2003). Thus, it will be much less probable that a local utility will profit from an investment by a national TNO rather than from an investment by large municipal utilities with similar technologies and challenges. 5a. Formal collaboration in joint companies is furthered by homophily between partners, in particularly by similar size and location in the same region.

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5b. Formal collaboration in shareholding structures are promoted by local proximity (i.e. location in the same region), too. For size we expect an heterophily effect, i.e. probability of shareholding between two local utilities rises with the difference in size. 6. Formal horizontal shares and joint companies offer solutions to a variety of problems of local utilities, such as financial restriction, lack of technological knowledge and liabilities of smallness that may drive local utilities into taking in private shareholders. Formal horizontal shares and joint companies therefore are functional prerequisites to vertical cooperation and shareholdings and prevent regional and national providers from being contacted as potential partners by local utilities 7. We expect a negative effect on engagement in energy generation, particularly in green technologies, by private shareholders, mostly regional and national suppliers, and of vertical cooperation with TNOs, RNOs and their subsidiaries. The latter will not be interested in investing into competing business. 8. Horizontal shares and joint companies are expected to further the engagement of local utilities in energy generation, particularly in RES and micro CHP indirectly via gaining economies of scale (c.f. effects of size). 9. Because of the role of similar values and challenges and lateral peer level cooperation for the creation of trust and the success of knowledge transfer, joint companies are the most important drivers of engagement in generation particularly for medium sized utilities, while large utilities profit from shares in smaller medium sized utilities. 10. Public ownership is an important precondition for formalisation of horizontal cooperation between local utilities, while private shareholdings tend to lead to cooperation with RNOs resp. TNOs. Our analysis is based on data from the Markus DVD, a German business database edited by the Creditreform. We extracted the shareholding data of 716 local utilities. For each of the local utilities, data on their direct shareholders and tow-step indirect shareholders as well as the shares directly held by municipal utilities (e.g. shares in other local utilities and in joint companies) were extracted. In addition we use the data from the questionnaire study of local utilities described in Jansen (Chapter in this volume). Further, we combined the network data with attributes of actors such as region and size from the Markus DVD and – in a second step – with data on collaboration strategies and engagement in generation technologies.

4 The Interlocking of the German Energy Sector 4.1

Private Shareholding and Collaboration Strategies

The Markus DVD shows that 40% of municipal utilities active in electricity distribution (n ¼ 637) have private shareholders. For the network data set we can establish a clear relationship between size and attractiveness for other shareholders

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from the municipal sector as well as from the private sector (c.f. Hypothesis 1). This will be elaborated in Sect. 4.1.1. A deeper analysis of strategies and areas of vertical and lateral collaboration and the role of shareholdings for them can be based on the questionnaire data and the expert interviews. Of those which answered the questionnaire 43% have private shares (n ¼ 135). Vertical cooperation of local utilities with TNOs or RNOs are quite rare in energy generation (both 9.5%, n ¼ 1272), but typical in grid management (25.2%) and distribution (22.1%) with respect to RNOs. Utilities with private shareholdings are more prone to cooperate with RNOs (36% versus 32%) than those without, With respect to grid management 56% compared to 44% cooperate with RNOs (Phi ¼ 0.201, sig. 0.024) and with respect to distribution 51% compared to 43% (Phi ¼ 0.193, Sig. 0.029) do so. There is very few cooperation with TNOs in these areas. Lateral cooperation with selected other local utilities or formalized and larger forms of cooperation are most frequent in distribution (26.8%) and generation (22.1%). They were still rare in network management (7.9%) at the time of the polling of the study, but are meanwhile a prominent field of formalised joint companies and shared services. Those with private shares are less prone to cooperate in generation formally (29% compared to 71%, Phi ¼ 0.118, Sig. 0.184) and informally (33% compared to 67%, not significant).With respect to distribution, 65% of local utilities without private shareholders collaborate formally, while only 35% of those with shares do so (Phi ¼ 0.050, not significant). Less clear is the pattern for informal horizontal collaboration. Here we find that 57% of those without private shareholders collaborate compared to 44% of those with shares (not significant). Formalised horizontal cooperation tends to imply public ownership. Thus there is evidence for hypothesis 10. Ownership structure has a strong influence on the opportunities available for local utilities in informal and formal collaboration. Intensive information exchange is most frequent within formalised forms of cooperation (63%) followed by informal exchange with other selected local utilities (48.8%). This corroborates hypothesis 3 that exchange of knowledge is supported mostly by horizontal rather than vertical cooperation. TNOs are not a relevant source of information (13.4%), RNO a bit more often (26%). Exchange with TNOs and RNOs is again more frequent for utilities with private shareholdings, thus showing another incidence of hypothesis 10. Evidence from the qualitative interviews with local utilities RNOs and TNOs shed more light on the motives for collaboration. Lateral collaboration among local utilities ranges from informal information exchange to joint companies in generation, portfolio management and energy trade and recently also in operating of the local and regional grids. Formal collaboration tends to imply municipal ownership. The strategic goals of horizontal collaboration are the pooling of resources in order to gain economies of scale and scope, the transfer of knowledge and the preservation of municipal autonomy. According to the qualitative interviews, the most important motivation of municipalities and local utilities to take in private shareholders is the restriction of municipal budgets. Thus shareholders are welcome

Valid cases ¼127 for each analysis.

2

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as financial investors for instance in the refurbishment and upgrading of old CHP plants. In addition, the competitive pressure from liberalisation of the markets triggered a great deal of anxiety in small local utilities to be unable to survive in the market. With the support of a shareholder from the energy sector, local utilities hope to be better positioned to buffer new risks of competition and to deal effectively with the new demands in portfolio management as well as new regulatory demands. Private shareholders can offer long-term and attractive supply contracts to them. This corresponds to the motivation of many investors from the energy sector. They often see local utilities as an extension of their value chain. They are interested in investing in the refurbishment of old local power CHP plants and in getting access to local heat sinks. In addition they offer local utilities services such as IT services in billing and metering or energy portfolio management and energy trade. This supports hypothesis 4 which postulates that horizontal shareholding and joint companies can help to overcome the lack of economies of scale and of technological knowledge in the field of generation and other upstream and downstream fields. It also shows evidence that particularly for smaller local utilities taking in private shareholders will lead to a loss of independence in many business fields and will have negative effect on engagement in energy generation, particularly in new technologies. In some cases, we found a sort of strategic partnership between local utilities and regional or national suppliers. Local utilities sell shares to acquire knowledge on how to deal with the market regulation (emission trading, network regulation, unbundling) and to get access to knowledge on energy trading and portfolio management and financial backing for investments in new generation technologies. In very rare cases, large suppliers are interested in local utilities as an experimentation field and in gaining access to energy-efficiency projects of municipal facilities (e.g. Interacting). Pilot projects to test new generation technologies (e.g. fuel cells, micro cogeneration) and smart metering at the customer are conducted in collaboration with local utilities which have better knowledge on customer interests and are trusted locally. Joint pilot projects usually are conditional on formal collaboration/shareholdings. Thus we can conclude that there is evidence for a potential of the municipal sector to guard independence and economies of scale by horizontal informal and formal cooperation. We also find evidence that private shareholdings may prevent local utilities from engagement in horizontal collaboration, corroborating hypothesis 6 and 10.

4.1.1

Interlocking Within the Municipal Energy Sector

In order to get a picture on the relevance of horizontal interlocking of local utilities and the potential of the municipal sector in electricity we generated a network data set covering all local utilities (716) based on the Marcus DVD. We look into two types of networks as different opportunity structures for formal collaboration: (1) the directed network created by horizontal directed shareholding ties, and (2) the undirected network created by joint companies as undirected edges between local

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utilities. Collaboration between local utilities is considered to be a central strategy for local utilities to cope with the new pressures which arose from the market liberalisation (c.f. H 3 and 4, 8 and 9). The analysis is based on 716 local utilities. Two forms of collaboration were considered: (1) directed shareholding ties (the average percentage of shareholding is 38.54%) indicating an ownership of shares of one local utility by some other, and (2) undirected joint company ties indicating the joint holding of shares by two or more local utilities of one or more of the 147 joint companies in generation, procurement and trade of electricity (c.f. Table 2 for an explanation of the categories). Furthermore data on the size of the municipality were gathered and the location of the local utilities given by the postal code was sorted according to the demarcated grid areas of the four large suppliers. In the operationalisation of collaboration we follow the strategy that Powell et al. (1996) employed in an analysis of collaboration in the field of biotechnology companies successfully. We analyze direct shareholdings and indirect ties via engagement in joint service companies in the German municipal utility sector. Our data and analysis confirm the results received by Powell et al. (1996). Although the ties were generated purely based on formal shareholding and joint company data, those ties can be seen as a proxy for an underlying network of informal collaboration (c.f. Sect. 4.1 and hypothesis 10). A visualization of the resulting network for the 716 local utilities is given in Fig. 1. The network contains the directed shareholding ties (black arrows) and the undirected joint company ties (grey arcs). An outgoing arrow means that a local utility holds shares of some other, and an ingoing arrow means that shares of this local utility are owned by the local utility sending the tie. The shade of grey of the dots represents the region and the size of the dots the size measured as number of inhabitants in their traditional supply area. The components of the networks are separated for the visualization and sorted by size. Basic network structure indicators were computed for the joint company and the shareholding network separately and for the combined network of both ties, as it is visualized in Fig. 1 (c.f. Table 3). The visualisation and inspection of the combined network reveals, in consideration of the fact that the market liberalisation only started around 2000, a rather high level of interconnectedness and reachability. There are 138 direct shareholding ties and 666 undirected joint company ties (c.f. Table 3). Nearly half of the local utilities (43.68%) are involved in a direct or indirect collaboration. The largest component is composed of 113 local utilities (c.f. the upper left in the network visualisation in Fig. 1). Table 2 Legend to Fig. 1: different colours indicate the region of the 716 local utilities

Shade of grey

Local utility in TNO-region EON

Number of local utilities 278

RWE

183

Vattenfall

166

EnBW

89 ∑ 716

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Isolates (average size) 156 108 41 96

Fig. 1 The network of directed shareholding ties (black arrows) and undirected joint company ties (grey arcs) for 716 local utilities. The size of the dot is proportional to the size of the city of the local utility and the color represents the region (see Table 2). The components of the network are separated, sorted by their size Table 3 Basic indicators of network structure Network # Ties density

Largest component (%)

Average cluster coefficient

% Isolates

Shareholding network Joint company network Combined network

1.68 8.79 15.78

0 0.87532 0.83514

69.13% 80.44% 56.32%

138 666 800

0.0002692 0.0026019 0.0028714

Direct shareholding and indirect collaboration in joint companies seem to be mutually exclusive strategies, since there are only four ties in the network which combine a joint company and a shareholding relation. But note that at the level of a specific local utility both collaboration strategies for different partners can coexist. Consequently the combination of the network of joint company and shareholding ties raises the size of the components and the connectivity of the actors markedly. Furthermore there is a difference in the structural property of both types of ties. Whereas joint company ties often connect a set of more than two local utilities in a dense network, for direct shareholding ties, there is no transitivity, as a comparison of the average cluster coefficients (Watts and Strogatz 1998) in Table 3 (0 versus 0.875) shows. The cluster coefficient measures the cliquishness within a local area around an actor. Thus we find evidence for hypothesis 2 on the creation of different types of opportunity structures by shareholding ties and joint company ties. The overall network of the municipal sector thus combines the two types of collaboration and results in an intermingling of tree-like and clique structures.

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To reconstruct the underlying collaboration strategies of the local utilities we combine the network data with data on region and size of the local utilities. We discern three types of collaboration strategies (1) joint company ties, (2) ingoing and (3) outgoing shareholding ties. The specific combination of collaboration strategies is cross-tabulated with the respective size of the local utility (the size of the municipality is used here as a proxy of the firm size) (c.f. Table 4). The average size of the 716 municipalities’ traditional supply areas is 57.497 inhabitants. The 401 isolate local utilities without collaboration ties typically are the smallest ones (av. size 41.758). In contrast the 269 local utilities which are involved in either shareholding ties or joint company ties are slightly larger than the average size. The most active local utilities with both shareholding and joint company ties (n ¼ 46, av. size 137.114), are characterized by the largest size. Thus hypotheses H1 and H2 on the enabling role of size as a factor enabling collaboration and the difference of the two opportunity structures for collaboration can be corroborated. Size of local utilities, this can be concluded, is positively correlated with the capacity for collaboration and discriminates between types of collaboration. Shareholding ties typically go from very large local utilities (n ¼ 103, av. size 111.222) to local utilities in municipalities slightly larger than the average (n ¼ 124, av. size 68.632). Joint company ties are established typically between large, but not very large local utilities (n ¼ 140, av. size 82.044). These evidences correspond to the results on the structural differences between the two types of networks (c.f. Table 3). Joint company networks are much more cliquish than shareholding networks. The latter, on the contrary, reveal an asymmetric, non-transitive structure. A more sophisticated statistical analysis of the attributes of actors and relational data is used to confirm these results and to render them more precise. To this end the networks of the joint company ties and of the shareholding ties were analysed separately with two ERGMs (exponential random graph models) (Robins et al. 2007; Snijders et al. 2006).3 ERGMs allow to analyse the interrelation of attribute data and the network structure, e.g. the existence of homophily or heterophily effects (c.f. McPherson et al. 2001 for a theoretical discussion of homophily). Table 4 Comparison of average size of local utilities sorted by types of collaboration ties Size of the city n of the local utility Std. Local utilities without collaboration ties 401 41.758 67.811 Local utilities with either shareholding ties or joint companies ties 269 67.343 112.273 Local utilities with ingoing shareholding ties 124 68.632 91.640 Local utilities with joint companies ties 140 82.044 162.154 Local utilities outgoing shareholding ties 103 111.222 159.123 Local utilities both shareholding and joint company ties 46 137.114 199.835 All local utilities 716 57.497 101.950

3

The analysis was done with the ERGM package of R (Handcock et al. 2010)

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Table 5 ERGM for the shareholding network (model 1) and the joint company network

Edges/Arcs Same region Difference size Isolates

ERGM – Modell 1

ERGM – Modell 2

Only direct shareholding ties

Only joint company ties

Coeff.

Stdd.

P-value

Coeff.

Stdd.

P-value

9.30E + 03 2.00E + 03 1.28E 03 4.61E + 01

3.23E + 02 1.98E + 02 4.20E 04 1.90E + 02

<1e 04*** <1e 04*** 0.00228** 0.80805

4.58E + 03 2.42E + 03 1.98E 03 5.66E + 03

5.32E 10 4.11E 10 1.03E 04 0.000e + 00

<1e 04*** <1e 04*** <1e 04*** <1e 04***

The edges and the isolates term are standard terms in ERGMs (Hunter et al. 2008) Signif. codes: 0 ‘***’ 0.001 ‘**’ 0.01 ‘*’ 0.05 ‘.’ 0.1 ‘ ’ 1

Homophily means that the probability for shareholding resp. joint company ties is higher for similar utilities, heterophily means that the probability is higher for different utilities. In our analysis for both types of networks a homophily-effect for the region is assumed (c.f. H5a and H 5b), which means we expect collaboration ties inside the same region to be more probable than between regions. For the size of the local utility we expect differing effects, depending on the kind of tie. For shareholding ties we expect that a difference in size makes them more probable (heterophily), with typically large local utilities holding shares of smaller ones (c.f. H5b). In contrast, for the joint company ties we expect that similarity of size facilitates cooperation (c.f. H5a). The results of the analysis are presented in Table 5. All predicted effects are significant. The coefficient for the same region is positive in both models and the coefficient for the difference of size is positive in Model 1 (heterophily) and negative in model two (homophily). Thus shareholding ties seem to have a more expanding, one-sided, vertical character, whereas joint company ties seem to be more reciprocal ties at a peer-level.

5 Collaboration Strategies, Horizontal Interlocking and Strategies in Generation In this chapter we base our analysis on a joint dataset including indicators from the networks analysis and data from the utility questionnaire on collaboration and generation strategies. For the latter we build on the factors that were identified as important determinants of the engagement of local utilities in different generation technologies in Jansen (Chapter in this volume).

5.1

Interdependencies Between Collaboration and Formal Interlocking

Table 6 summarises the results from cross-tabulations between collaboration strategies in selected business fields offering opportunities for gaining economies

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Table 6 Relations between horizontal and vertical collaboration in generation, distribution/ marketing and grid management and engagement in joint companies and shareholding among local utilities (Cramers V, significance, n ¼ 127 for all analyses) Vertical Vertical Informal Formalised Collaboration Collaboration horizontal horizontal RNO. . . collaboration . . . collaboration. . . TNO. . . Questionnaire Markus DVD . . .in energy . . .in energy . . .in energy . . .in energy generation generation generation generation Joint companies +0.378 sig. 0.000 +0.223 sig. 0.012 0.143 sig. 0.143 Holding shares +0.230 sig. 0.010 0.114 sig 0.200 Receiving shares +0.172 sig.0.053 . . .in distribution . . .in distribution . . .in distribution . . .in distribution +0.088 sig. Joint companies 0.0322 +0.114 sig. 0.200 +0.093 sig.0.0292 0.099 sig. 0.267 Holding shares 0.127 sig. 0.281 Receiving shares . . .in grid . . .in grid . . .in grid . . .in grid management management management management Joint companies +0.162 sig.0.068 0.096 sig. 0.281 Holding shares +0.177 sig. 0.046 Receiving shares 0.125 sig. 0.157

of scale and scope by pooling of resources. These are energy generation, distribution of energy, and grid management. We report the correlation measure Cramers’s V and its significance for the relations between horizontal and vertical collaboration and the three types of network ties discussed above (Holding ties, receiving ties and being related by a joint company). As expected by hypothesis 4, we can see that in the field of generation there is a strong and significant correlation between formal and informal collaboration and the existence of joint company ties at the horizontal level. Joint companies and outward directed ties also show a slight negative correlation with the probability of vertical collaboration with an RNO. Receiving shareholding ties, on the other hand, seems to increase the dependence of local utilities on collaboration with RNOs thus supporting the hypothesis 2 on the more asymmetric character of shareholding and on the difference between the two opportunity structures , while holding shares allow for collaboration with the large TNOs. In the field of distribution, we find a similar pattern, albeit none of the correlation measures is significant here. Joint company relations are positively associated with formal and informal horizontal collaboration (c.f. H 4) and negatively associated to vertical collaboration with RNOs, corroborating hypothesis 6. The latter is also true for holding shares in other local utilities. While collaboration in energy generation and distribution were quite often mentioned in our study, joint grid management at that time (2005) was not yet an important topic. The pattern is the same as for distribution. There are significant

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positive correlations between formal and informal collaboration and being engaged in joint companies or holding shares in other utilities. Engagement in joint companies or receiving shares again seems to make local utilities less dependent on collaboration with RNOs (c.f. H 6). Holding shares in other local utilities tends to go together with vertical collaboration with national suppliers in generation and distribution of electricity. The other way round, incoming shares increase the probability for vertical cooperation with regional suppliers in generation, but decrease the probability for collaboration in distribution and grid management. Thus we find confirmative evidence for hypothesis 2. Joint companies on the contrary show the benefit of being less prone to need collaborative support from RNOs and are strongly correlated to informal and formal collaboration in all business fields.

5.2

Effects of Horizontal Shareholding and Joint Companies on Engagement in Innovative Generation Technologies

In this chapter we look into the role that vertical and horizontal formal interlocking has for the engagement of local utilities in electricity generation and particularly in new resp. energy efficient generation technologies. We focus on two generation profiles, engagement in RES and in micro CHP as dependent variables. We chose these two business fields as the most innovative generation technologies in the overall generation portfolio of local utilities (c.f. Jansen Chapter in this volume). For reasons of comparison, we also run a regression on the overall generation variable including all types of generation covered by the questionnaire (c.f. Jansen Chapter in this volume). We entered the indicators of the interlocking in the sector (vertical private shareholders, and joint companies and horizontal shareholding) within the municipal sector as additional explanatory factors into regression analyses using the standard innovation related variables, size, innovation related attitudes and practices, technological synergies and collaboration strategies as control variables (c.f. Jansen Chapter in this volume). For this analysis, we joined the network data from the PAJEK dataset to the STATA data from the utility questionnaire. We start with an analysis of the effects on being engaged in energy generation irrespective of the type of technology to give a background for the more specific analyses. Table 7 shows the effects of attitudes, service and collaboration strategies and horizontal and vertical interlocking on engagement in all types of generation technologies (micro CHP, large CHP, RES, fuel based and other large established technologies (watercraft). We find that market orientation has a positive but not significant effect on overall generation. Implementing innovative service (i.e. selling electricity beyond one’s established demarcated area and having a more than average proportion of business customers) on engagement in electricity generation (c.f. H 1b in Jansen Chapter in this volume) is of greater relevance and has a positive and significant effect on engagement in energy generation. In addition, also an

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Table 7 Effects of engagement in formalized horizontal shareholding and joint companies on energy generation (all technologies) Model 1 Model 2 Model 3 # inhabitants 2.83e–06 2.97e–06 7.92e–07 Market orientation 0.726 0.696 0.548 Modern distribution strategy 2.649** 2.778** 2.830** Horizontal collaboration in distribution 1.410*** 1.381** 1.483*** Private shareholdings 0.491 0.477 0.648 Shares in other local utilities 0.854 Shares from other local utilities 0.712 Joint companies 2.241** Constant 0.287 0.182 0.258 Log likelihood 50.813 50.839 48.003 LR chi2 26.20 26.15 31.82 Prob > chi2 0.0002 0.0002 0.0000 Pseudo R2 (MF) 20.50 20.45 24.8940 N 125 125 125 *p 0.1; **p 0.05; ***p 0.01; ****p 0.001

innovative collaboration strategy in distribution has a positive significant influence. As expected in hypothesis 7, private shareholding has a negative effect, albeit not significant. With respect to the structure of the municipal sector, it can be corroborated that holding shares in other local utilities and even stronger in joint companies with other local utilities significantly promotes the engagement of local utilities in electricity generation (c.f. hypothesis 8). Joint companies can compensate for the lack of economies of size typical for the medium sized utilities as can be seen from the lowering of the positive effect of size in model 3. Explanatory power rises from 20.5% to 25% (McFaddens R2) after the introduction of the indicators of horizontal interlocking. Table 8 again exhibits the expected signs with respect to market orientation, innovative distribution strategies and horizontal collaboration in generation, resp. distribution, but effects are not significant. The negative sign of horizontal collaboration types, market orientation and strategies is due to a strong correlation between these factors and the number of received shares from other local utilities resp. of engagement in joint companies. The strongest effects come from the variables measuring the interlocking within the sector. As expected vertical collaboration in generation and private shareholding have strong and significant negative effects on engagement in micro CHP. Thus, there is additional evidence for Hypothesis 7. Horizontal shareholding and particularly engagement in joint companies have significant positive effects on engagement in micro CHP, strengthening the evidences for hypothesis 8. Again we see that joint companies reduce the positive effect of size, thus help small and medium sized utilities to gain economies of scale. In addition we find evidence for the transfer of technological knowledge from large CHP and

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Table 8 Effects of horizontal shareholding and joint companies on engagement in micro CHP Model 1 Model 2 Model 3 # inhabitants 1.34e–06 9.65e–07 5.79e–08 Market orientation 0.149 0.035 1.636 Modern distribution strategy 0.0877 0.159 0.0396 Horizontal cooperation in generation 0.284 0.126 0.559 Horizontal cooperation in distribution 0.709 0.672 0.882 Vertical cooperation in generation 2.411** 2.13*** 2.246** Private shareholding 0.994** 1.055** 1.083** Engagement in large CHP 2.13* 2.123** 2.859** Degree of Engagement in Renewables 0.809*** 0.929*** 0.683** Shares in other local utility 1.300* Shares from other local utility 0.906 Joint companies 2.029*** Constant 3.672*** 0.3672*** 0.4.284*** Log Likelihood 52.265 53.131 48.294 LR chi2 46.23 44.50 53.98 Prob > chi2 0.0000 0.000 0.000 Pseudo R2 (MF) 30.67 29.52 35.80 N 126 126 126 *p 0.1; **p 0.05; ***p 0.01; ****p 0.001

RES promoting micro CHP engagement (Hypothesis 2 and 3). Adding the structural factors leads to a strong increase in explanatory power. McFadden’s R2 rises up to 35.8%. Table 9 on engagement in RES technologies gives further evidences for the role of attitudes and values, particularly with respect to environmental values. The degree of environmental engagement of local utilities has a significant and stable positive effect on engagement in RES. Market orientation and strategy again have the expected positive sign, but small and not significant effects. Private shareholding and vertical cooperation in grid management as expected have negative effects, albeit for vertical cooperation the effect is not significant (c.f. hypothesis 7). The latter effect may be due to the costly and volatile character of RES energy, that makes them little attractive for the regional networks operators. Outgoing and incoming shares from other local utilities have a positive sign, but again fail to be significant – probably because of overlapping with formalised horizontal cooperation in generation (Hypothesis 8 and 4). Joint companies have a strong positive and significant effect on engagement in RES, again corroborating hypothesis 9. In addition we find a change of the role of size when introducing joint company relations adding evidences for hypothesis 8. To sum up, we again find a strong explicatory role of the structure of collaboration and interlocking within the energy sector.

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Table 9 Effects of engagement in formalized horizontal shareholding and joint companies on engagement in RES Model 1 Model 2 Model 3 # inhabitants 1.76e–06 2.56e–06 2.56e–06 Self concept as market actor 0.150 0.1315 0.146 Modern distribution strategy 0.651 0.758 0.711 Degree of customer services in energy efficiency and promotion of green technologies 0.465** 0.461** 0.449** Private Shareholdings 0.781* 0.788** 1.850* Vertical cooperation in grid management 0.669 -0.712 0.674 Formalized horizontal cooperation in generation 1.294** 1.285** 0.949* Shares in other local utilities 1.0789 Shares from other local utilities 0.655 Joint companies 0.949* Constant 1.286* 0.651 1.320** Log likelihood 66.761 67.483 67.483 LR chi2 39.56 38.12 40.51 Prob > chi2 0.0000 0.0000 0.000 Pseudo R2 22.86 22.02 23.41 N 125 125 125 *p 0.1; **p 0.05; ***p 0.01; ****p 0.001

6 Summary and Conclusions We find clear evidence for the enabling role of size as a factor enabling horizontal collaboration and as opening different opportunity structures for collaboration (Hypothesis 1). Table 4 provides data on the types of collaboration and average sizes. Table 6 shows that receiving shares, i.e. being small, increases the probability of collaboration with RNOs and TNOs. Table 7 shows that receiving shares from other local utilities has a negative effect on being engaged in any generation technology, probably because of lacking necessary economies of scale. The differences in the opportunity structures opened by different roles in shareholding, respective by holding shares in joint companies is also reflected in the structure of the two types of networks analyzed in Sect. 4.1.1: For the shareholding network we find a treelike, asymmetric network structure, for the joint company network we find a high degree of cliquishness indicating more horizontal relationships (c.f. cluster coefficient in Table 3). Thus hypothesis 2 on the structural differences within the horizontal interlocking between local utilities can be confirmed. In hypothesis 3 we expect that horizontal informal collaboration leads to learning by doing and knowledge transfer, particularly in new technologies. In Sect. 4.1 we can show that intensive information exchange is most frequent in formalized horizontal cooperation, followed by informal horizontal cooperation. TNOs and RNOs are a source of information very rarely and this is conditional on private shareholdings. In Sect. 5.1 we can show that there are significant correlations between formal and informal cooperation in energy generation and in distribution and the engagement in a joint company (c.f. Table 6).

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According to hypothesis 4, informal and formal horizontal collaboration are expected to lead to formalization of the pooling of resources, and in effect can help to create economies of scale in technologies of energy generation. Tables 7–9 corroborate this hypothesis indirectly. Model 1 tests an additional effect of holding shares, model 2 looks into receiving shares and model 3 into the effect of joint companies. For engagement in energy generation irrespective of technology we find a strong decrease in the effect of size in model 3. Thus joint company relationships can create the typical benefits of size. They offer an alternative to mergers. For the special case of micro CHP (Table 8) we observe a strong decrease in the effect of size on engagement in this technology in model 2 (receiving shares) and model 3 (joint companies). Thus, receiving shares or holding shares in a joint company increase the probability of being engaged in micro CHP by allowing for the creation of economies of scale. The same can be observed in the case of RES but on a lower level for models 2 (receiving shares) and model 3 (joint companies). In hypothesis 5a we expect that formal collaboration in joint companies is furthered by similarity in size and region (homophily). This can be confirmed by the ERGM Model 2 in Table 5. The probability of collaboration between local utilities increases significantly with location in the same region. It decreases significantly with the difference in size. For the shareholding network we expected in hypothesis 5b that the probability of shareholding relations increases with being located in the same region. Albeit we expect that there are size differences between those that hold shares, and those that receive shares. ERGM Model 1 in Table 5 confirms these expectations. Differences in size and location in the same region increase the probability of a shareholding relationship between two local utilities. With respect to hypothesis 6, we find that joint company relationships and in some business fields also shareholding ties also decrease the probability of vertical collaboration with the large national resp. regional suppliers, albeit the effects fail to be significant (c.f. Table 6). This holds for cooperation with the RNOs and joint company relations and holding shares with respect to the business fields of generation and distribution. In addition joint company relations and receiving shares prevent cooperation with RNOs with respect to grid management. Vertical collaboration usually goes together with private shareholdings (Ch 4.1). Formalized joint companies and horizontal shareholding thus constitute a safeguard against the need to take in private shareholders and help to maintain the independence of smaller local utilities. In hypothesis 7 we postulated that private shareholdings and vertical cooperation have negative effects on the probability of an engagement of a local utility in innovative energy generation technologies. The analysis of the qualitative interviews shows that at the time of the interviews (2005/2006) the dominant motivation to take in private shareholders were the restrictions of the municipal budgets, search for money for the refurbishment of old DHP plants, and anxiety of small utilities to withstand the competitive pressures of the liberalised energy markets. Private shareholders were able to offer solutions for all these problems, e.g. guaranteeing long-term contracts, or helping with portfolio management or IT-based metering

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and billing systems. The large suppliers were interested in getting access to the local CHP plants and heat sinks and in selling IT services. Thus they most often see their investments as an extension of their value chain. Thus it does not come as a surprise that private shareholdings have negative effects on engagement in energy generation for all technology bundles analyzed. For micro CHP and for RES these effects are strong and significant. For overall generation the effect is negative. It fails to be significant, the reason being a positive effect on large traditional generation strategies. Vertical cooperation in generation in addition has a significant negative effect on micro CHP. Vertical cooperation in grid management has a negative, but not significant influence on engagement in RES. Thus we can conclude that vertical cooperation and private shareholding decrease the probability of local utilities being engaged in innovative energy generation technologies. On the other hand, we can conclude that informal and formal collaboration and formalized shareholding and joint companies increase the probability of a local utility to be engaged in energy generation and particularly in innovative generation technologies (Hypothesis 8). Horizontal shares in distribution create larger markets for the sale of energy and have a significant positive effect on engagement in energy generation irrespective of technologies (Table 7). Coefficients for horizontal cooperation in energy generation and in distribution in Table 8 (RES) have the expected signs in models 1 and 2, but fail to be significant. In model 3 with the introduction of the effect of joint companies, the sign of cooperation in generation changes because of high correlation between the variables. Joint companies are the largest significant and stable factors. They show significant positive effects on engagement in energy generation irrespective of technology and for micro CHP and RES. Receiving shares from other local utilities has a negative, not significant effect on generation overall. With respect to micro CHP and RES both roles of shareholding, holders of share and recipients are more likely to be active in the respective types of generation. Effects of holding share are generally larger than those of receiving shares. For micro CHP the effect is significant. Effects of receiving shares are lower and not significant in both technologies. Thus joint companies are the most important drivers of innovative generation for medium sized utilities. They allow to safeguard independence, create opportunities to create economies of scale, and allow for the exchange of information and (implicit) knowledge at a peer level, characterised by trust, a shared understanding of the tasks, and shared values. For large utilities the holding of shares offers chances to gain external growth and economies of scale. The two models are exclusive, there are only 4 cases with an overlap of shareholding tie and joint company tie. Albeit large utilities do hold joint company ties to actors not otherwise related to them. Size is the discriminating factor here. From the evidence reported in this contribution, we conclude that there is a potential to strengthen generation capacities of the municipal sector as well as capacities in other downstream and upstream business fields such as trade of energy and distribution, metering and billing. The most important effects clearly come from the sector structure. While the establishment of joint companies and shareholding

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within the sector strengthen local utilities generation capacities, vertical shareholding displays significant negative effects on the engagement of local utilities in generation. The creation of contestable markets is the necessary condition for the concept of disaggregated regulation underlying the European and the German energy market regulation. There is not much choice of potential competitors disciplining the large four suppliers by competition. Next to the local utilities, in particular the larger ones and consortia, there is only the option of building on electricity generation and suppliers from abroad. This idea is pushed forward by the Antitrust Board in its recent sector study (Monopolkommission 2009: Ch. 6.2.1.2). Particularly, they argue for a change from explicit auctions to implicit auctions which are characterised by a lower discrimination potential. However, the commission also sees substantial problems. These are substantial delays in the development of European interconnections of the transport networks, red tape between the member states and unclear resp. low competencies of Agency for the Cooperation of Energy Regulators. Reports on failures of Open Market Coupling (c.f.p.97, art 361) and on the obstacles and conditions of importing electricity from much cheaper East European suppliers (c.f. p. 96. art.357) do not promise bright prospects, neither for increasing competition, nor for a fast development of the interconnecting infrastructure. The most recent initiative of the EU commission for a directive on regulation on energy markets integrity and transparency in addition does not discern between large and small energy suppliers and thus might overburden small competitors or discourage them from market entry (c.f. Bundeskartellamt 2011b: p. 287). Confronted with the prospect of ownership unbundling E.ON simply engaged in an exchange of grid ownership with a European competitor. This makes the potential of obstruction evident that the large European suppliers have at their hands. Given that in the north of Germany large wind power plants are in construction, the problem of bottlenecks in the German grid can be foreseen to become more badly soon. Bottlenecks are managed by the large suppliers by so called cost-based redispatching. Costs of energy generation plants are paid for by the TNO and are apportioned to the users of the grid. However, there is no incentive to improve the performance of the grid. In addition there is a clear discrimination potential, because large vertically integrated suppliers can easily shove the bottleneck energy demand to their own power plants (Monopolkommission 2009: pp. 93–94, art 346 and 347). Next to the ownership structure and the low degree of competition in the electricity markets, there are political obstacles to the entry resp. success of new competitors from the municipal sector resulting from a lack of reliability of programmatic goals of energy policy. Many local utilities have invested in new large CHP plants, mostly on mineral coal base, and met – after successful negotiation of the terms for the plant – sudden changes of mind of local policy. At the federal level, they met the denunciation of the Nuclear Energy Compromise and the prolongation of the life spans for nuclear plants. Both policies strongly strengthen the market dominance of the large suppliers and endanger the prospects of many municipal power plant projects in planning resp. in construction (cf. Bontrup and

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Marquardt 2010: pp. 377–384, 404). In addition, the legal regulation of economic activities of municipal companies ties the competition with the private sector to tight conditions. These prevent local utilities from engagement in energy efficiency services or from selling energy beyond their demarcated area. We support here the assessment by the Federal Antitrust Agency, that in particular the generation capacities of municipal utilities and the establishment of consortia for the construction of larger base load plants can promote competition in the energy sector. The Federal Agency therefore suggests to ease the regulation of this field. If local utilities are asked to become competitive market actors they also must have the rights to take part in competition. This holds also for the rules of public procurement (Bundeskartellamt 2011b: pp. 289–291).

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Local Utilities Under the EU Emission Trading Scheme: Innovation Impacts on Electricity Generation Portfolios Katrin Ostertag, Nele Glienke, Karoline Rogge, Dorothea Jansen, Ulrike Stoll, and Sven Barnekow

1 Introduction In January 2005, the EU wide emission trading scheme (EU ETS) for large stationary emitters of CO2 started in its then 25 Member States. The general objective of this novel economic instrument is to help the EU cost-efficiently achieve its Kyoto commitment of reducing its greenhouse gas emissions (GHG) by 8% by 2008– 2012 (compared to 1990) and future – possibly more stringent – GHG reduction goals. With a view to the scale of long-term emission reduction requirements, climate protection innovations will have to play a major role. It is therefore of utmost importance to understand how the EU ETS influences activities in these technologies. Research on innovation effects of emission trading has been rather limited and tended to focus on theoretical concepts.1 Only a handful of emission trading schemes have actually been practised for more than 5 years, mostly in the US.

1

For an overview see Jaffe et al. (2002) and Requate (2005).

K. Ostertag (*) • K. Rogge Fraunhofer Institute Systems and Innovation Research, Breslauer Straße 48, 76139 Karlsruhe, Germany N. Glienke EWE AG, EWE.CO2 Solutions, Tirpitzstraße 39, 26122 Oldenburg, Germany D. Jansen German University of Administrative Sciences and German Research Institute for Public Administration, Freiherr-vom-Stein-Straße 2, 67346 Speyer, Germany U. Stoll Statistisches Landesamt Baden-W€ urttemberg, B€ oblinger Str. 68, 70199 Stuttgart, Germany S. Barnekow BDEWe.v., Landesgruppe Norddeutschland, Heidenkampsweg 39, 20097, Hamburg, Germany D. Jansen et al. (eds.), Sustainability Innovations in the Electricity Sector, Sustainability and Innovation, DOI 10.1007/978-3-7908-2730-9_5, # Springer-Verlag Berlin Heidelberg 2012

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Therefore, empirical studies of their innovation effects are still limited and focus on US schemes for trading SO2, NOx and lead.2 Specifically concerning the EU ETS, a small number of theoretical studies looked at its potential innovation impact in an ex ante perspective.3 These publications identify design elements that could be important in determining its innovation effects. Empirical research on the EU ETS has concentrated on its implementation at the level of firms.4 Besides, research also focuses on design options based on lessons learnt from the first trading phase (2005–07) and on comparing the national allocation plans of Member States.5 Empirical research on innovation effects of the EU ETS has been rare so far,6 with the exception of some recent additions (Rogge and Hoffmann 2009; Rogge et al. 2010). In this paper, we analyse innovation effects using data from the first 2 years of operation of the EU ETS (2005–06), mostly based on a survey carried out in spring 2006.

2 Background and Methodology Our analysis of the innovation effects of the EU ETS focuses on German local utilities. In Germany, some 260 of the approximately 1,850 installations subject to the EU ETS in the first trading period belong to local utilities (i.e. 14%). In 2005–07, these installations received an allocation of approx. 32 million EU emission allowances (EUAs) per year, which represents only about 6% of the German ETS budget. Despite the relatively small amount and share of emissions covered by the EU ETS, local utilities are important players for the diffusion of climate protection innovations because they control “the last mile” of the electricity grid and can rely on established customer relations. These aspects make local utilities a particularly interesting group to look at. We further focus on the innovation fields of CHP and RES because their promotion is, among others, a priority of the European Union and its Member States for reasons of environmental protection and security of energy supply. Our results are based on a postal survey that was conducted in spring 2006 among all German local utilities subject to the EU ETS (n ¼ 122).7 The survey was composed of two questionnaires addressed to the Executive Board and to the staff

2

For an overview, see Gagelmann and Frondel (2005). They analyze experiences from these pioneering US emission trading schemes in order to conclude some lessons learnt for the choice of EU ETS design options with regard to innovation incentives. 3 E.g. Schleich and Betz (2005), Gagelmann and Hansj€ urgens (2002), Anger et al. (2005), Betz et al. (2006), Schleich et al. (2009), Rogge and Linden (2010). 4 This includes monitoring, risk management, trading, accounting, etc. See e.g. Betz et al. (2005b). 5 See Schleich and Betz (2007), Betz et al. (2006), DEHSt (2005), Betz et al. (2004). 6 See Cames and Weidlich (2006), Cames (2007), Hoffmann (2007). 7 A comprehensive survey of firms subject to the EU ETS conducted on behalf of the European Commission concentrated on larger players only. See McKinsey and Company/Ecofys (2006).

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responsible for the EU ETS. It was carried out by the German Research Institute for Public Administration Speyer in cooperation with the Fraunhofer ISI. The response rate was 36% (n ¼ 44) for the Executive Board questionnaire and 47% (n ¼ 57) for the EU ETS questionnaire, respectively. In addition to these data from the EU ETS survey, we used data from a parallel survey among all German utilities (see Jansen et al. 2007). Further, we used registry data from the German Emissions Trading Authority (DEHSt),8 e.g. for the amount of allocated allowances. Data for the size of the utilities and their ownership structure were taken from the MARCUS database.9 About half of the utilities subject to the EU ETS were still fully publicly owned at the time of the survey. The majority (81.1%) of them disposed of a surplus of allowances in 2005 and 42% employ more than 250 employees. Controlling for a potential bias in our sample, the size of the responding local utilities is slightly larger (45% more than 250 employees). With respect to the frequency distribution of public ownership (45%) and of overallocation of allowances (82%) responding local utilities correspond to the population. There is neither a bias in regional distribution nor in membership of public sector organizations such as the association of municipal firms (Verband kommunaler Unternehmen VKU). Thus, there is no problematic bias in our sample. The remainder of the paper is structured in the following way: First, we look at the performance of German local utilities in innovative generation strategies at the time of the survey. We analyse its influence on the allocation situation of the utilities in the first trading phase and test for a probable influence of size and private shareholdings. Second, we identify EU ETS compliance options considered by local utilities and analyse the factors influencing the EU ETS strategy choice of the utilities. Putting the focus on activities in RES and CHP we test for a probable influence of size and private shareholdings. Finally we associate our findings with recent and future developments of the EU ETS and provide an outlook on future research.

3 The Performance of Local Utilities in Innovative Generation Strategies First, we take a look at the innovation performance of the utilities subject to the EU ETS that responded to the Executive Board questionnaire. The measurement of the innovation performance is based on a factor analysis of the power generation profile of the complete sample from the parallel survey among all German utilities (see Jansen et al. 2007; n ¼ 128, n ¼ 102 active in power generation). Conventional

8

European Commission (2006). MARCUS database administered by Creditreform (s. Creditreform 2006) contains data about all German and Austrian enterprises listed in the commercial register. For our analyses we used the update 65 of the year 2006. 9

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technologies such as power generation based on fossil energy carriers, cogeneration with fossil energy carriers and hydro-power characterize conventional generation. Micro cogeneration (<50 kWel) as well as generation and cogeneration based on innovative renewable energy sources characterize innovative generation. For both dimensions count variables are used to operationalize high and low engagement of the specific profiles. For the complete sample there is a significant positive correlation between the two indicators (Phi ¼ 0.24, n ¼ 102) which looses significance for the smaller subsample subject to EU ETS (Phi ¼ 0.17, n ¼ 44). The innovation performance in generation depends on activity and knowledge in conventional generation. In addition, a positive attitude towards the new opportunities of liberalization, an innovative service performance in distribution, engagement in environmentalism in distribution and public relations, and horizontal collaboration in generation have positive effects on the performance in innovative generation strategies. The data show that utilities which were already engaged in innovative generation technologies at the time of the survey or were planning activities in the future less often received an underallocation of EUAs in 2005–07 (Cramer’s V ¼ 0.21, n ¼ 44).10 This shows that German allocation rules for the first trading phase did not punish proactive emission reduction efforts in domains outside the scope of the EU ETS. A look at the shareholding structure reveals that public utilities are much more active in innovative forms of power generation, particularly in RES. Private shareholdings seem to slow down investments in these activities (Phi ¼ 0.24, n ¼ 37). By contrast, private ownership has a small positive effect on overallocation (percentage difference +13). The size11 of a local utility is irrelevant for the allocation situation but furthers the entry into innovative generation technologies (Cramer’s V ¼ 0.20, n ¼ 44).

4 The Response of Local Utilities to the EU ETS EUAs introduce a new cost factor into the calculations of local utilities – both for existing and planned installations. In consequence, local utilities have to reconsider their energy production strategies. They have several compliance options at their disposal. These can be classified into three categories, which are complementary rather than mutually exclusive. First, local utilities can make use of the market mechanism by selling (or purchasing) allowances in excess (or needed) on the carbon market. Second, they may try to lower their emissions using technological or organisational measures such as fuel switching, or demand-side-management. Third, local utilities can try to avoid the obligations resulting from the EU ETS, e.g. by decreasing their energy production.

10

Note that this is so although large CHP installations which received a bonus allocation under the EU ETS, in 2005–07 are counted as conventional generation. 11 Organisations with less than 250 employees were classified as small, organisations with more than 250 employees as large utilities.

Local Utilities Under the EU Emission Trading Scheme

87 % of answers

Sale of EUAs

63%

Increasing RES capacity

46%

Increasing energy efficiency of existing installations

44%

Increasing CHP capacity

35%

Purchase of EUAs

33%

Increased use of decentralised installations

26%

Fuel switch

25%

Demand-side-management

25%

Decrease of energy production

21%

Sale of installations that fall under EU ETS

5%

Change of operator for installations that fall under the EU ETS

5% 0%

20%

40%

60%

80%

Fig. 1 EU ETS compliance options considered by local utilities (Source: Fraunhofer ISI)

In our survey, we asked local utilities to indicate in a list of ten possible compliance options those considered as possible choices for their response to the EU ETS.12 Figure 1 shows the resulting ranking of all compliance options for the whole sample (n ¼ 57). The top five choices (marked in black) are the active use of the carbon market (sale and purchase of allowances), increased activity in the innovation fields of RES and CHP, and energy efficiency improvements of existing installations. Interestingly, CHP and RES appear under the top five compliance options considered by our respondents. The high ranking of CHP may be explained by the special allocation rules of the EU ETS in Germany; For the first trading phase a bonus allocation of EUAs for existing CHP plants and a double allocation based on both the amount of electricity and the amount of heat produced (the so-called “double benchmark”) for new CHP plants was applied (European Commission 2007). This allocation rule led to a surplus allocation in most cases and therefore set a positive incentive to invest in CHP. This conclusion is supported by further findings of our survey showing that the German bonus allocation for CHP plants is considered as “important” or “very important” for their EU ETS strategy by 64% of the respondents (n ¼ 57, cf. Fig. 3). Apparently, the German implementation of the EU ETS in the first trading phase has been successful in providing an economic incentive for investments in CHP plants. The high ranking of RES as an EU ETS strategy option may seem surprising because RES installations do not benefit from a surplus allocation of EUAs. Findings from a survey among international power and gas utilities come to the same conclusions showing that the majority of the European respondents (66%) increased investments in RES in response to the EU ETS.13 One possible explanation is that the exclusion of RES plants from all EU ETS obligations (including monitoring and

12

Several answers were allowed. PWC (2007), p. 37.

13

88

K. Ostertag et al. % of answers Increasing RES capacity

62%

Sale of EUAs

57%

Increasing energy efficiency of existing installations

52%

Fuel switch

38%

Increasing CHP capacity

36%

Increased use of decentralised installations

29%

Purchase of EUAs

26%

Demand-side-management

24%

Decrease of energy production

14%

Sale of installations that fall under EU ETS

0%

Change of operator for installations that fall under the EU ETS 0% 0%

20%

40%

60%

80%

Fig. 2 EU ETS compliance options considered by local utilities engaged in innovative generation ¨ V Speyer) strategies (Source: FO

reporting activities) represents a possibility to sidestep the scheme and might therefore lead to additional investments in RES. However, further findings of our survey show that the exclusion of RES plants is perceived as “less important” or “not important” by 80% of the respondents (cf. Fig. 3). Another explanation is provided by Rogge et al. (2010) who find an indirect impact of the EU ETS for renewables investment through the scheme’s contribution to vision changes regarding renewables, but also point to the importance of general landscape changes due to climate change and its corresponding policies.14 Correspondingly, the high ranking of RES could be the overriding effect of the German Renewable Energy Sources Act 2004 (Erneuerbare-Energien-Gesetz) which obliges grid operators to pay a fixed tariff above the market price for “green” electricity fed into their grid. In the literature, the RES Act is considered to be still the most important policy instrument supporting the diffusion of RES in Germany.15 An additional explanation for the high ranking of RES might be the generally rising interest in RES in the past years that is also felt by local utilities.16 Figure 2 shows the ranking of compliance options for the subgroup of utilities that are engaged in innovative generation strategies (n ¼ 25), the top five choices are again marked black. A comparison of Figs. 1 and 2 shows that increasing their

14

The term « landscape changes » refers to the multi-level perspective on innovation systems as developed e.g. by Geels (2002) or Markard and Truffer (2008). 15 Walz (2005) analyzes the interaction effects of the German RES Act and emission trading, and concludes that, with rather low allowance prices, the RES Act will continue to be an important element of German climate policy as it ensures the consideration of technological long-term perspectives. 16 The PWC study shows that the encouragement of renewable energy is now leading the list of key issues for the European power industry. PWC 2007, p. 5.

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RES capacity moves up as top compliance option for those utilities already engaged in innovative generation technologies while CHP as a compliance option remains more or less stable. New among the top five options appears the option to switch fuels with 38% of respondents choosing this answer (up from 25%).

5 Factors of Influence on the EU ETS Compliance Strategy

percentage of total answers

In order to gain deeper insights into the factors influencing the EU ETS strategy choice of local utilities, we asked them to indicate the importance ascribed to ten factors given in a list. Each had to be ranked on a scale of four, ranging from “very important to not important”. Figure 3 shows the resulting ranking. These findings indicate that the EU ETS strategies of local utilities in Germany depend on economic signals, regulatory uncertainty, and price uncertainty generated by the carbon market. The price of EUAs is by far considered most important (more than 90% of the answers, n ¼ 57). Focussing only on the group of local utilities considering CHP and/or RES as responses to the EU ETS, our data show that these utilities perceive the uncertainties about future allocation rules and about the price for EUAs more often as “very important” than utilities not considering such a response. For example, 29.2% of them rate the EUA price-uncertainty as “very important”. This is true for only 10.7% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

very important

important

less important

not important

Fig. 3 Factors of influence on the EU ETS strategy of local utilities (Source: Fraunhofer ISI)

percentage of total answers

90

K. Ostertag et al. 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

very important

important

less important

not important

Fig. 4 Factors of influence on the EU ETS strategy as rated by utilities with an innovative ¨ V Speyer) generation portfolio (Source: FO

of the other utilities (Cramer’s V ¼ 0.291). Apparently, the utilities considering activities in CHP and/or RES as responses to the EU ETS are more sensitive to the uncertainties linked to the scheme. Edler et al. (2007) assume that in combination with fluctuating allowance prices uncertainty about future reduction targets and allocation rules result in unreliability of investment planning, which might have both a negative and a positive effect on activities in low-carbon innovation fields. Organisations will either wait for more certainty making use of the market mechanisms for the time being, or they will try to reduce the economic risks accruing from the EU ETS via reduction efforts.17 Our findings suggest that, for the case of local utilities, the above described uncertainties enhance the consideration of climate protection innovations, such as RES and CHP. Figures 4 and 5 compare two subgroups of the sample – those with an innovative generation portfolio (n ¼ 25) and those with a conventional generation portfolio (n ¼ 25) as introduced in Sect. 3.18 In comparison to the latter, utilities with an innovative generation portfolio (i.e. micro-CHP and RES) seem to be less concerned about EUA price-uncertainty: Only 7% of the innovative group rate this factor as “very important” compared to 15% of those with a conventional generation portfolio. As we showed earlier, utilities with an innovative generation

17

See Edler et al. (2007). Regulatory uncertainty of the EU ETS and its relevance for investment decisions in the power sector is also studied by Hoffmann et al. (2008, 2009). 18 Note that the groups are not necessarily exclusive. Utilities with large CHP installations belong to the conventional group; only micro-CHP is considered as innovative generation technology.

percentage of total answers

Local Utilities Under the EU Emission Trading Scheme

91

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

very important

important

less important

not important

Fig. 5 Factors of influence on the EU ETS strategy as rated by utilities with a conventional ¨ V Speyer) generation portfolio (Source: FO

portfolio also more often dispose of a surplus of EUAs. A surplus of allowances makes them less vulnerable to volatility in EUA prices because they do not have to buy EUAs on the market. This possibly explains why they are less concerned about price uncertainty. Utilities with an innovative generation portfolio also seem to be less worried about other uncertainties arising from the EU ETS scheme, i.e. uncertainties about future allocation rules and about the future German EU ETS budget. By contrast, the exclusion of RES plants is more important to them. Finally, we take a closer look at the influence of size and ownership structure of utilities on their consideration of CHP and RES as an EU ETS strategy. Concerning RES, our data show that there is a slight correlation between ownership structure and the consideration of increased RES activities (Phi ¼ 0.23). 66.6% of the utilities owned by their municipality regard RES as a possible EU ETS compliance option vs. only 43.3% of the privatized utilities. Results from the survey among the Executive Board also show an overall strong negative correlation between engagement in RES and private ownership (Phi ¼ 0.34). A potential reason might also be a risk aversion of private shareholders which is corroborated by the data (Phi ¼ 0.15). In addition, values of local utilities seem to have some effect on the consideration of RES as a compliance option. While a self concept as a firm managed according to private sector standards lowers the probability to invest in RES (Phi ¼ 0.36, n ¼ 34), a self concept as a risk taking local utility increases the probability (Phi ¼ 0.26, n ¼ 34). As to CHP, privatised utilities are significantly less often engaged in fossil CHP than the public ones (Phi ¼ 0.30, n ¼ 49). In contrast, the correlation of private

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ownership structure and the consideration of CHP as an EU ETS strategy is moderately positive (Phi ¼ 0.18, n ¼ 49). A control for size makes the picture clearer. For the subset of small utilities there is a moderate negative effect of private shareholder involvement on current fossil CHP activities (Phi ¼ 0.26, n ¼ 27), while there is a strong positive effect for large utilities (Phi ¼ 0.62, n ¼ 22). While small utilities are probably not able to mobilize financial resources for a CHP generation strategy from private shareholders, this might be a viable strategy for large utilities. Again there is a negative effect of a private sector self concept on the probability that CHP is considered as a compliance option (Phi ¼ 0.46), while – probably because of size of the necessary investments – the willingness of risk taking for municipal goals has a moderate positive effect (Phi ¼ 0.26, n ¼ 34). We find no correlation between size and current activity in fossil based CHP for the subsample. By contrast, there is a strong correlation between the size of a utility and its consideration of CHP as an EU ETS compliance option (Cramer’s V ¼ 0.56). On the one hand this might be due to the higher financial and human resources of larger utilities to react to the EU ETS and to decreasing average transaction costs. Further findings from our data support this argument. They show that the costs related to the handling of the EU ETS are perceived less often as “very important” by larger utilities (Cramer’s V ¼ 0.334). On the other hand, a higher exposure of larger utilities to the scheme might also be a reason. Larger utilities emit more CO2 in absolute terms and they therefore dispose of a higher number of EUAs which represent a larger financial value. As they also dispose of a higher abatement potential in absolute terms their pressure to act might be higher than for smaller utilities.19

6 Conclusions and Future Perspectives In this paper we analysed the effects and working mechanisms of the EU ETS in its first trading phase (2005–07) on strategic choices of German local utilities’ activities, putting the focus on activities in the fields of RES and CHP. Summing up our findings, we see that publicly owned municipal utilities falling under the EU ETS are more likely to be active in innovative forms of power generation, defined here as RES (except hydro-power) and micro-cogeneration (<50 kWel). By contrast, private shareholdings hinder investments in such generation technologies. Further findings from the same research project20 show that, with respect to RES, this higher level of activities is positively influenced by the stronger commitment of

19

These results on the influence of size and private shareholdings complement our findings on the preconditions for the entry into the business field of generation with respect to ownership structure and size (Jansen et al. 2007). 20 The research project « Diffusion of innovations in energy efficiency and in climate change mitigation in the public and private sector » was funded by the VW foundation. For further information see also http://www.isi.fhg.de/isi-en/n/projekte/diffusion_klimaschutzinnovationen. php or http://www.foev-speyer.de/diffusion/inhalte/01_home.asp.

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municipality-owned utilities to the issue of environmental protection (Jansen et al. 2007). Innovative performance in generation in general depends on size and on knowledge in conventional generation. Thus, size is an important limiting factor. Utilities with innovative generation portfolios profited from their climate friendly generation profile in the allocation of allowances. We find that RES and CHP figure highly among the compliance options considered as most important by local utilities. For utilities with innovative generation portfolios, increasing their RES capacity is even the EU ETS strategy most often considered for the future. With a view to the factors determining these choices we found that, for the sample as a whole, utilities owned by the municipality are more likely to regard RES as a compliance option. By contrast, the consideration of CHP as compliance option is more likely for privately owned utilities. Differences in values and self concepts might explain these differences. Concerning other factors of influence on a utility’s EU ETS strategy, our findings indicate that, besides the price for EUAs, uncertainties related to the regulatory scheme itself – such as uncertainty about future allocation rules and EU ETS budgets – figure highly among them. This is in line with results by Cames (2007), who finds that significant investments in new power plants in Germany may be postponed because of uncertainty about future allocation rules.21 Utilities with innovative generation portfolios seem to differ in that respect. They are relatively less concerned about uncertainties arising from the EU ETS. By contrast, utilities engaged in conventional generation are more worried about future allocation rules, and also about their own actual allocation situation. This suggests that innovative generation technologies may serve as a safeguard against regulatory burdens. Further, our results lend support to the request that future allocation rules and emission targets should be known far in advance to be more in line with the length of innovation cycles (see e.g. Betz et al 2005a). In the first trading period, the special allocation rules for CHP in Germany figure highly among the factors influencing the choice of the compliance strategy and explain why CHP is among the compliance options most often considered by utilities. These findings show that the technology specific provisions for CHP in the German National Allocation Plan did have some effect in promoting this technology. The degree to which an emission trading system should actually set such technology specific incentives is controversial. As Schleich and Betz (2005) point out, the merits of a trading system are that carbon market prices and the flexibility in the choice of the compliance strategy guide investment decisions thereby providing a variety of different energy/carbon-saving technologies and a least cost solution. In their view, technology specific allocation rules for new

21

However, this is qualified by Hoffmann et al. (2009) who identify three underlying motivations why in the case of the EU ETS as a flexible regulation characterized by a high degree and discontinuous resolution of uncertainty, companies do not necessarily postpone investment decisions: securing competitive resources, leveraging complementary resources, and alleviating institutional pressure.

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installations inhibit these working mechanisms and decisions by policy makers, rather than the market, determine the incentives (see also Schleich and Betz 2007). Against this background, our findings on the effectiveness of these technology policy elements within the EU ETS have the following implications for further policy making. First, they underline the necessity of constantly watching over the rationale for such technology policy elements and their continued appropriateness. Secondly, these provisions need to be kept in accordance with other policy instruments used for the same purpose. This concerns in particular the German law for the preservation, modernization, and expansion of CHP (KWKModG) of 2002 with its amendment of 2009 and the subsidy programme for highly efficient small scale CHP-plants of 2008 (see Arens et al. 2009) which was, however, stalled in 2010 for budgetary reason. Future research should aim at validating our current findings, in particular with respect to determining the rationale underlying a utility’s response to the EU ETS. Furthermore, comparing our results to the responses of large, national utilities to the EU ETS and with the activities of other actors in the fields of CHP and RES would allow conclusions to be drawn on the specific role of local utilities in these fields. Our study was limited by the fact that the introduction of the EU ETS was rather recent at the time of the survey and the allocation of EUAs in the first round was rather generous. As a result, the data available were limited and the effects to be expected were rather weak. However, the decisions of the EU Commission on the National Allocation Plans (NAPs) of EU Member States for the second trading phase (European Commission 2007) led to a more stringent allocation of allowances and thus – ceteris paribus – to scarcer and thus potentially more expensive EUAs in the second trading phase.22 The effect of the rising scarcity of EUAs on climate protection innovations, and in particular the role of German local utilities in this field given the background of energy market liberalisation, thus remains an important research topic. Finally, a comparison with other European countries could shed more light on the role and interdependencies of specific national allocation rules, environmental regulations, and national specificities with respect to liberalisation in the energy sector. The interaction between liberalisation and climate policy needs to be well understood, if economic efficiency and environmental goals are to be reconciled. Acknowledgements We gratefully acknowledge the financial support of the VW foundation (grant number AZ II/80 547) for carrying out this study.

22

The total quantity of EUAs available in Germany in the second trading phase amounts to 453 Mio tonnes, 50 Mio. tonnes less than in the first trading phase. The German NAP also foresees that almost 10% of the allowances allocated to the energy producing industry will not be given out for free but sold on the market. However, the financial and economic crisis significantly weakened the stringency of the EU ETS, as production and thus emission levels dropped, thereby lowering the EUA price as well.

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References Anger N, Braun M, Duckat R, Santarius T, Schmid S, Sch€ule R (2005) Makro€okonomische Wirkungen des Emissionshandels. Die Einf€ uhrung von Emissionshandelssystemen als sozial€okologischer Transformationsprozess. Hintergrundpapier I/05, JET-SET, Wuppertal Arens M, Pfluger B, Bradke H, Eichhammer W, Fleiter T, Jochem E, Klobasa M et al (2009) Rationelle Energieverwendung. BWK Das Energie Fachmagazin 4:148–155 Betz R, Eichhammer W, Schleich J (2004) Designing national allocation plans for EU emission trading - a first analysis of the outcome. Energy Environ 15(3):375–426 Betz R, Rogge K Schleich J (2005a) Die Innovationswirkungen der Allokationsregeln im Treibhausgasemissionsrechtehandel. In: Edler J (Hrsg.) Politikbenchmarking – Nachfrageorientierte Innovationspolitik, TAB-Arbeitsbericht 99, Fraunhofer ISI, Karlsruhe, Kap. 4.5.2, S. 268–286 Betz R, Rogge K, Schleich J (2005b) In: Umweltministerium Baden-W€urttemberg (ed) Flexible instrumente im Klimaschutz. Emissionsrechtehandel, joint implementation, clean development mechanism. Eine Anleitung f€ ur Unternehmen. Umweltministerium Baden-W€urttemberg, Stuttgart Betz R, Rogge K, Schleich J (2006) EU emissions trading: an early analysis of national allocation plans for 2008–2012. Climate Policy 6(4):361–394 Cames M (2007) Emissions trading and innovation incentives in the German electricity industry – an empirical investigation. Presentation in Berlin, 27/28 Nov 2007 Cames M, Weidlich A (2006) Emissions trading and innovation in the German electricity industry. In: Antes R, Hansj€ urgens B, Letmathe P (Hrsg) Emissions trading and business. Proceedings of a workshop held in Wittenberg, Germany. Springer Physica Verlag, Heidelberg, 11–14 Nov 2003 Creditreform e.V (2006) Marketing-DVD Marcus DVD – Marketingdatenbank Update 65/Juli 2006. Creditreform e.v. / Bureau van Dijk Neuss Frankfurt DEHSt (2005) Implementation of emissions trading in the EU: national allocation plans of all EU states. DEHSt, Berlin Edler J, Betz R, Rogge K, Schleich J et al (2007) Nachfrageorientierte innovationspolitik. Benchmarking-Studie f€ ur den Deutschen Bundestag, TAB-Arbeitsbericht, Karlsruhe European Commission (2006) Community Independent Transaction Log (CITL). http://ec.europa. eu/environment/ets/. Accessed 6 Apr 2010 European Commission (2007) National Allocation Plans: Second Phase (2008–2012). http://ec. europa.eu/clima/documentation/ets/allocation_2008_eu.htm. Accessed 1 Aug 2011 Gagelmann F, Frondel M (2005) The impact of emission trading on innovation - Science fiction or reality? Eur Environ 15:203–211 Gagelmann F, Hansj€urgens B (2002) Climate protection through tradable permits: the EU proposal for a CO2 emissions trading system in Europe. Eur Environ 12:185–202, gleichzeitig UFZDiskussionspapier 1/2002 Geels FW (2002) Technological transitions as evolutionary reconfiguration processes: a multilevel perspective and a case-study. Res Policy 31(8–9):1257–1274 Hoffmann V (2007) EU ETS and investment decisions: the case of the German electricity industry. Eur Manage J 25(6):464–474 Hoffmann VH, Trautmann T, Schneider M (2008) A taxonomy for regulatory uncertainty— application to the European emission trading scheme. Environ Sci Policy 11(8):712–722 Hoffmann VH, Trautmann T, Hamprecht J (2009) Regulatory uncertainty: A reason to postpone investments? Not necessarily. J Manage Stud 46(7):1227–1253 Jaffe AB, Newell RG, Stavins RN (2002) Environmental policy and technological change. Environ Resour Econ 22:41–69 Jansen D, Barnekow S, Stoll U (2007) Innovationsstrategien von Stadtwerken – Lokale ¨ V Discussion Stromversorger zwischen Liberalisierungsdruck und Nachhaltigkeitszielen. FO ¨ V, Speyer Papers 41, FO

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Markard J, Truffer B (2008) Technological innovation systems and the multi-level perspective: towards an integrated framework. Res Policy 37(4):596–615 McKinsey & Company; Ecofys (2006) Review of EU emissions trading scheme - survey results. European Commission, Directorate General for Environment, Brussels PriceWaterHouseCoopers (2007) Energy and efficiency. The changing power climate. http://www. pwc.ch/user_content/editor/files/publ_energy/pwc_utilities_global_survey_07_e.pdf. Accessed 6 Apr 2010 Requate T (2005) Dynamic incentives by environmental policy instruments - a survey. Ecol Econ 54:175–195 Rogge KS, Hoffmann V (2009) The impact of the EU ETS on the sectoral innovation system for power generation technologies - findings for Germany. S2/2009, working paper sustainability and innovation, Fraunhofer ISI, Karlsruhe Rogge KS, Linden C, (2010) Cross-country comparison of the replacement incentives of the EU ETS in 2008–12: the case of the power sector. S1/2010, working paper sustainability and innovation, Fraunhofer ISI, Karlsruhe Rogge KS, Schneider M, Hoffmann VH (2010) The innovation impact of EU emission trading – findings of company case studies in the German power sector. S2/2010, working paper sustainability and innovation, Fraunhofer ISI, Karlsruhe Schleich J, Betz R (2005) Incentives for energy efficiency and innovation in the European emission trading system. In: ECEE 2005 summer study - what works & who delivers. pp 1495–1506 Schleich J, Betz R (2007) EU emission trading – Better job second time around? In: ECEE 2007 summer study: saving energy - just do it, pp. 1469–1483 Schleich J, Rogge K, Betz R (2009) Incentives for energy efficiency in the EU emissions trading scheme. Energ Effic 2(1):37–67 Walz R (2005) Interaktion des EU Emissionshandels mit dem Erneuerbare Energien Gesetz. Z Energiewirtschaft 29(4):S. 261–S. 270

Exploring the Linkages Between Carbon Markets and Sustainable Innovations in the Energy Sector: Lessons from the EU Emissions Trading Scheme Lisa Knoll and Anita Engels

1 Introduction: Linking Carbon Markets to Sustainable Innovation in the Energy Sector? The European Emissions Trading Scheme (EU ETS) is a central instrument of European climate policy and the first large-scale multi-national greenhouse gas trading programme in the world. It was referred to as the “grand new policy experiment” (Kruger and Pizer 2004). One of the central promises of emissions trading is to provide a price signal on the basis of which companies can calculate whether any shortage of emission allowances should be met with buying more allowances in the trading scheme or with reducing CO2 emissions. From these micro-rational calculations the most efficient CO2 abatement at the macro-level will ideally emerge, as emissions will be reduced where the costs for reducing them is lowest – “an epoch-making means of cost-effective control which can solve future global environmental problems” (Svendsen 1999: 232). Emissions trading thus has a potential to trigger sustainable innovations in the sense that companies face incentives to improve their CO2 performance (Stankeviciute et al. 2008). Still, the EU ETS has been criticised for many short-comings, among others for not providing triggers of innovation decisions in companies due to weak price signals. In a recent study on German companies in the CO2 market the authors point out that most of the CO2 reduction measures in Phase I of the EU ETS were only an unintended effect of emissions trading (Detken et al. 2009: 6–7). However, while the price of CO2 allowances was high in the first year of the EU ETS, some electricity providers mentioned having an incentive to supply electricity from gasfired plants rather than from more carbon-intensive coal-fired plants (MacKenzie 2009: 169).

L. Knoll (*) • A. Engels Centre for Globalization and Governance, University of Hamburg, Allende Platz 1, 20146, Hamburg, Germany D. Jansen et al. (eds.), Sustainability Innovations in the Electricity Sector, Sustainability and Innovation, DOI 10.1007/978-3-7908-2730-9_6, # Springer-Verlag Berlin Heidelberg 2012

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As the link between any emissions trading scheme and investments in more sustainable innovations seems to be a function of the price of the CO2 allowances, there is a long academic debate about the price level and the specific price mechanisms that would effectively force companies into more sustainable investments (DeCicco et al. 1993; Tonn and Martin 2000; Grubb et al. 2002; Fischer 2005; Metz and van Vuuren 2005). In attempts to model pathways towards a decarbonised global economy it is often assumed that technological progress is induced by relatively high prices of carbon (Barker et al. 2006). A recent study on adaptation and mitigation strategies suggests that the costs for mitigation in Europe especially in the energy sector will turn into investments into a profitable future around the year 2050 “when the cumulative savings of energy imports become higher than the mitigation investments” (Schade et al. 2009: 348). The study stresses that for each of the models providing such an optimistic scenario, carbon will have to be given a price. However, the authors also acknowledge that price signals are not sufficient to deliver the necessary incentives and therefore have to be accompanied by sectoral policies. Market signals always represent short-term incentives whereas system transitions require a long-term perspective. Especially in the European energy sector it is necessary, so the authors recommend, that high and stable CO2 prices are set to foster the phase-out of CO2 emitting fossil generation, by either using CO2 taxes or cap and trade systems (Schade et al. 2009: 354). While the linkage between prices and induced technological changes is well established in the modelling literature, less research has been done on the question of how exactly these linkages can be conceptualised if one looks at real companies in real emissions trading schemes. Empirical innovation studies have demonstrated a range of effective barriers to the diffusion of available sustainable technologies (e.g. Unruh 2000), and even more so to the innovation process itself. They demonstrate that innovations cannot be generated easily, and that complex institutional conditions influence the way in which organisations develop innovations (Edquist 1997; Garud and Karnøe 2003). These approaches have been rarely applied to the question of sustainable innovations induced by carbon markets. This contribution aims at filling this gap by looking at the various channels through which the price of CO2 allowances enters a company’s decision-making processes. This paper draws from a 3-years-research project on the emissions trading behaviour of companies under the EU ETS.1 It focuses on case studies in 2 countries (Denmark and Germany) and in 2 industrial sectors (energy and food). We added the food industry to this article (which mainly aims at understanding CO2 trading in

1 The project was funded by the German Research Foundation (DFG) from August 2006 until August 2009 (DFG 488/2-1; 2–2), and conducted at the University of Hamburg, Centre for Globalization and Governance. To create a broad picture of the companies’ approach towards emissions trading, the Emissions Trading Study conducted a survey in three consecutive years that was responded by 385 (in 2006), 360 (in 2007) and 315 (in 2008) companies. The survey addresses 4 countries (Germany, United Kingdom, Denmark and the Netherlands) and covers all industries participating in the EU ETS (Engels et al. 2008). In addition to a quantitative approach, we conducted 16 company-level case studies in the 4 countries and in 5 industries.

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the electricity sector) because it is an energy-intensive industry, where companies often operate their own power plants. The paper is based on case studies, analysing the emissions trading behaviour of 4 companies from the energy sector and 3 companies from the food industry in Denmark and in Germany: Energy Sector: Electricity, gas, steam and hot water supply • • • •

German municipal utility A German municipal utility B big Danish energy provider small Danish district heating plant (feeding electricity into the Danish grid) Food Sector: Manufacture of food products and beverages

• Danish malt producer (beverage industry, feeding electricity into the Danish grid) • German dairy (operating their own coal-based power generation) • Danish fish meal factory (energy-intensive production) The case studies were conducted in 2008 and 2009 when the second phase of the EU ETS had just begun. They aimed at understanding how different economic actors (from different countries, industries and from different company-divisions) cope with the new decision-making problems and how they transform CO2 price information into economic, financial, or technological measures. The case studies were conducted via either group discussions or single interviews with the persons responsible for emissions trading. In this paper, we explore the potential linkages between carbon markets and sustainable innovations. The concrete decisionmaking cases of environmental managers, power traders and plant operators allow insights into the manifold factors that may or may not affect decisions on ‘sustainable innovations’ at various points in time, and also the arbitrariness of these linkages in the current EU ETS. The term sustainable innovation, which is the common theme of this volume, adopts a rather formal and abstract meaning in the context of this chapter.2 By sustainable innovations, any kind of technological or organisational innovation is meant that a company may introduce with the effect of lowering its specific CO2 emission levels or the CO2 intensity. We call this the improvement of the CO2 performance of a company. In the field of power generation, several technological and managerial options are already available or at least conceivable, among them are fuel switch options, the temporary closing of power plants, energy management systems, improved efficiency factors, carbon capture and storage, and various forms of carbon offsetting. In this paper, we are interested in the specific linkages of the EU ETS and the companies’ decision-making processes by which such innovations might be incurred. These specific linkages can be conceptualised at four different levels. (1) At the first level, initial allocation processes define whether a company is

2

For a general discussion on the term ‘sustainable innovation’ see Schwarz et al. 2010.

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EU ETS

1. Allocation of emission rights 2. CO2 trading decisions 3. Make or buy decision in the electricity market 4. Sustainable innovations (technological or organisational)

CO2 performance of a company

Fig. 1 Potential links between the EU ETS and a company’s CO2 performance

over- or under-allocated with emission rights. Our question is if the allocation mechanism is linked to a company’s CO2 performance. (2) The second level refers to the actual trading behaviour of a company once it has been allocated a certain amount of allowances, and engages in sell-, buy-, or hold decisions. (3) On the third level, we examine the make-or-buy decision of energy generation through the electricity market and its potential linkage to a company’s CO2 performance. (4) At the fourth level, decisions that concern investments in technological or organisational innovations aiming at reducing CO2 emissions are pointed out. In the following sections we analyse the potential linkages between emissions trading and the case-study companies’ CO2 performance at these four levels (Fig. 1).

1.1

Allocation of Allowances

One of the basic mechanisms of linking CO2 trading with the CO2 performance of a company is the initial allocation of allowances. In the case of the EU ETS, each government is responsible for developing a National Allocation Plan (NAP), which is subject to be reviewed by the European Commission (Ellerman et al. 2007a). Three different ways of distributing the total amount of allowances (cap) to the installations that participate in the scheme are discussed: grandfathering, benchmarking, and auctioning. Grandfathering is the cost-free allocation based on historical emissions. The allocation method considers absolute emissions in a specified baseline year only. Benchmarking takes a different approach in which the relative CO2 performance of a company is taken into account.3 The CO2 emissions of a company are compared either with the best available technology or the emission levels of “good performers” in an industry. A relatively good performance is thus rewarded by the allocation procedure. Still, the problem with benchmarking is the heterogeneity of technological and production processes that

3

For the debate on relative and absolute trading schemes see Kuik and Mulder (2004).

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often hinders comparability (Ellerman et al. 2007b: 352). Auctioning (or the selling) of emission rights allows a Member State to make a revenue out of emissions trading. Even though the EU Trading Directive allowed the auctioning of 5% of the allowances covered by each NAP in Phase I, and 10% in Phase II, most Member States refrained from auctions and opted for grandfathering as the allocation method of choice (Ellerman et al. 2007b: 362) – despite a critical debate on this allocation method. Michaelowa and Butzengeiger (2005) describe how grandfathering may result in over-allocation, leading to a market with low liquidity and a low CO2 price. And Neuhoff et al. (2006) criticise that this allocation procedure remunerates high emissions and penalises low emissions. The ‘dirtier’ a company is the more allowances it gets. In addition to the discussion on the general allocation method, there were complaints about the accuracy of the CO2 emissions data. Especially in Phase I, the data availability and accuracy was problematic in most EU Member States (Ellerman et al. 2007b: 339–340). In Phase II the data situation has improved, since verified emission reports are available from the first trading period. Even if the overall data situation is much better now – and will be better from trading phase to trading phase – there is a general problem with grandfathering. The allocation method links the cost-free allocation of emission rights to the coincidental capacity utilisation in a certain year. The Danish malt producer in our study, e.g., experienced a significant over-allocation in Phase I, because the company generated a high amount of electricity in the reference year due to temporarily high electricity prices. We were a little bit lucky. They based it [the allocation] on the years where we were running full speed. Everything is, you have to be lucky! That’s bullshit, but that’s the case! (Managing director of the Danish malt producer, 2008-06-10)

Competitors in the same industry decided not to enter the electricity market at the same time. They were not running their combined heat and power plant to feed electricity into the Danish grid – for reasons totally unconnected to their CO2 performance. Our COLLEAGUES4 in the malting business, who had a co-generation plant much earlier than ours, they were running down. So they have been hit by evaluating the smallest allocation. [. . .] They have been in other. . . In the beginning you got subsidy also for electricity and therefore they got out of that. So they were not producing so much. So, ah! (Managing director of the Danish malt producer, 2008-06-10)

This type of miss-allocation still happens in Phase II – in spite of an overall better data base due to verified emission reports. A municipal utility in Germany faced a “lucky” over-allocation in Phase II. I’m glad to say we have an economically sound over-allocation! [. . .] Because of our manufacturing constellation and a surprisingly positive notice from the DEHSt [German Emissions Trading Authority]. I’ll say it carefully, so we have a tremendous over-

4

Special intonations are displayed via capitalising words.

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allocation. [. . .] We didn’t challenge the notice. [. . .] Of course we were glad. Because of the historical emissions in one installation only one year was made as a reference point, and by chance that was a year with extremely HIGH production portions on our side. Yet, we have on the contrary a small installation, god bless, whose reference point was in a year in which it wasn’t running. Logically that means zero. We challenged the notice. But the case isn’t decided yet: We’re waiting for the outcome. Of course we’re unhappy about that, but the over-allocation easily compensates that. (Environmental manager of German municipal utility A, 2009-02-10, translated)

The interview sequence with the environmental manager of the municipal utility above-mentioned also shows that filing against under-allocation and accepting over-allocation is an economically suitable practice. In a Danish fish meal factory, the production load was based on the irregular fishing yields that fluctuate greatly from year to year. Here, too, the allocation outcome was seen to be ‘based on luck’. And the problem is that for a company like ours, our production is very much dependent on the raw material. It will change a lot year for year. So, it’s not really when we get FREE allowances based on historical data. It has nothing to do with the future. So for us, it would be much better if you would get the free allowances based on some KEY data, or something like that. [. . .] It’s based on luck and it sounds, for us it’s not really, it does not feel right that actually these free quotas represent a lot of money and that these big values are given out based on luck. It doesn’t feel right, I must say. But that’s how it’s done. (Energy engineer of a Danish fish meal factory, 2008-06-11)

The member of the management board of a German dairy that was underallocated in both Phases I and II also mentions the missing link between the allocation procedure and the CO2 performance. The company produces its own (cheap) energy in a coal-fired co-generation plant for its energy-intensive processes to manufacture dried milk products for the world-market. For us energy costs are a major factor and therefore we’ve been using co-generation for 25 years now. For us it’s nothing, nothing extraordinary. And therefore the discussion [on emissions trading] was a bit funny. Especially there weren’t any suggestions for energy IMPROVEMENTS. That was pretty curious. [. . .] Today we have an efficiency of 85 percent in the boiler. Let’s say it this way: the others have TO GET THERE first. (Technical board of management of a German dairy, 2008-04-14, translated)

As the emissions trading regulation does not differentiate between industrial sectors, but between activities, the coal-fired steam boiler of the dairy company is regulated like a steam boiler in the energy sector (Ellermann et al. 2007b: 358). That means that in Phase II were the energy sector in total has been under-allocated to the advantage of other industries, the dairy is regulated like an energy sector company. This case again shows that the allocation mechanism does not reward a ‘good’ CO2 performance. The absolute emissions of the dairy are significant, since its production processes are based on coal combustion, but on the other hand the processes are highly energy efficient in terms of a high efficiency factor and the possibility to burn organic waste. The fact that the initial allocation does not adequately reflect the individual CO2 performance of a company makes emissions trading a rather crude mechanism to promote sustainable innovations at that level. Instead, it fosters a pragmatic

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(and sometimes fatalistic) stance over emissions trading. EU allowances – in the perception of those managers – are not allocated as a result of good or bad CO2 performance, but based on the ‘luck’ or ‘bad luck’ of a full or low production in the baseline year. Their capacity utilisation in the base year was – by chance – either unusually high or low. In the energy sector, this can be due to a number of reasons, such as temporarily high or low market prices, temporary breakdown of plants and due to the weather.

1.2

CO2 Trading Decisions

Once the application process is completed and the emission allowances are on the companies’ accounts, managers have to find ways of calculating those virtual assets. In this section we want to shed light on the link between CO2 trading and CO2 performance based on concrete decision-making cases. Here, in theory, the market price of carbon allowances should be held against the costs of improving a company’s CO2 performance. The principal observation drawn from our case studies is that trading decisions are often decoupled from the companies’ CO2 performance. This can be seen in cases of over-allocation as well as under-allocation. In cases of under-allocation companies have to find ways of managing their own demand of emission rights on a regular basis. Each trading year ends with April 30th when operators have to surrender the amount of “used” allowances to the Environment Agency. The German municipal utility B decided for a month wise calculation of its CO2 demand. Allowances are bought when the month wise calculation indicates a demand. This means that CO2 is bought when CO2 is emitted and that the CO2 trading decisions are tied to the company’s CO2 performance. Still, the power trader perceives this demand oriented buying strategy to be a “riskstrategy”: Buying allowances at the end of a trading year would entail the risk of a high CO2 price in April when allowances must be surrendered. The buying decisions at the municipal utility B are thus much more concerned with avoiding the price-risk than with calculating CO2 emission reductions. In the German municipal utility A, which faced under-allocation in Phase I, we found trading decisions that are completely decoupled from any kind of demand calculation or CO2 performance. In addition to the demand calculation, the power trader used a certain amount of allowances to speculate on the price gaps in the CO2 market for the purpose of revenue-making. And then, suddenly, there were price fluctuations on the CO2 market. That’s when we said, we’ll try to SELL them, and if the prices go down, we’ll buy them back, to, to, just to play around a little bit. (Power trader of the German municipal utility A; 2008-07-30, translated)

The same German municipal utility faced over-allocation in Phase II and discussions started on what to do with the extra-money. The environmental manager issued a proposal for giving that extra-money into a climate change fund. That

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proposal is likely to be rejected because of deficits at other municipal divisions, e.g., public transport. The main problem is not only the climate activities, but also high prices and the encumbrances and so forth. Or the overdue investments, which need to be taken, all the way to maintaining public transportation and the losses made by the public swimming pool. One becomes very creative, when dealing with unexpected extra-money. (Environmental manager of the municipal utility A, 2009-02-10, translated)

A small Danish district heating plant used its over-allocation in a similar fashion for balancing its budgetary deficits. The district heating plant is owned and controlled by the customers that are provided with heat from the combined heat and power plant. When the price for electricity is right, the energy manager generates electricity and extra-income for keeping down the price of the heat. CO2 allowances are an additional commodity that the manager could use to subsidise heat. The duty of the energy manager of the company is to keep the price of the heat as stable and as low as possible. The aim is a balanced budget: neither too much profit, nor too much loss. In both cases the energy manager would have to explain the difference in income to his clients. Under the condition of an unsteady gas price this is a rather difficult target. Therefore, the manager of the district heating plant made a swap of EUAs into CERs to use the revenue in order to avoid “red numbers” in his yearly budget.5 I think we had nothing to lose in making this conversion to CER quotas. That was a GOOD thing for us and then we got some extra money and we got the same quotas. So there was nothing to lose. The only risk we had was that the quotas will have a higher price in about half a year. But it’s in this month we need the money because our budget here is running from the 1st of June till 30th of May. (Energy manager of the small Danish district heating plant, 2008-06-13)

As allowances are treated as assets and/or financial products, companies tend to solve other than environmental problems with emission rights.

1.3

Make-or-Buy Decision on Energy Generation

In the electricity market, CO2 has become an automatically calculated cost factor along with coal, gas and oil. In this chapter, we assess the link between the daily market-based decision on whether to run a power plant. To understand this daily make-or-buy decision, one first has to understand the European electricity market. The liberalisation of the EU electricity markets in the aftermath of the EU Directive of 1996 confronted the power providers with exchange-based energy trading. Even

5 A Certified Emission Reduction (CER) is a certificate that is generated under the so-called ‘Project-based Mechanisms’ (CDM and JI) that have their legal origin in the Directive 2004/ 101/EC which is amending Directive 2003/87/EC. CERs used to be cheaper than EU allowances. It is possible to cash in on the price difference by so called swap deals.

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for the chief power trader of the Danish energy supplier, liberalisation meant learning to regard electricity as a financial product. Everybody started to look at trading as part of their business. And everybody had to learn it from scratch. It has always been just producing power and buying and selling physical power. But now it became more evident, that financial trading would be a part of what these companies would be doing. (Power trader of a big Danish energy provider, 2008-09-01)

The duty of an electricity trading department is to optimise the daily make-orbuy decision based on price signals. At the European energy exchanges, electricity is traded one day ahead (spot market) and in the form of future contracts (forward market). Electricity producers thus plan on the basis of the forward market price and take a make-or-buy decision concerning their own electricity generation every day. This interplay between spot and forward market establishes planning security under the circumstances of a volatile electricity price. Market-based decisions on the power plant operation are complex and necessitate support in terms of trading know-how. In Denmark, small energy providers have been obliged to mandate an electricity trading company in helping them with their daily make-or-buy decision.6 We were told by the GOVERNment to HAVE a company to administrate this selling of electricity every day. (Manager of a small Danish district heating plant, 2008-06-13)

The Danish government assumed that these smaller companies did not possess a sufficient level of expertise in energy trading and obliged the companies to employ trading service providers, which furnish the daily prognosis of the electricity prices. The prognosis entails items like the current electricity price, the weather prognosis (wind and rain), and the prevailing power plant capacities. The second basis for deciding whether to produce electricity or not are the own production costs that entail the price for either gas, coal and/or oil, the CO2 price and may also entail the US Dollar exchange rate. The manager of the small Danish district heating plant receives the prognosis of the energy price development by its electricity trading company every morning. It shows the electricity price prognosis on the basis on which the manager makes his daily make-or-buy decision. Hence, the manager also has to decide whether he trusts the prognoses or not. In bigger energy corporations, those functions are spread across numerous organisational departments. The case of the big Danish energy supplier shows the organisation of the price-based electricity production via different departments. The company covers many installations and thus is divided into various divisions and responsibilities. First of all, there are the power plants that focus on surrendering

6 In 2007, the Danish energy market has been liberalised so that even small combustion plants can sell their surplus energy on the electricity market. Today, the Danish energy market not only covers typical energy suppliers, but also other industries which generate electricity as a byproduct. This means that many small Danish providers of district heating (often with less than 4 employees) and many companies of other energy-intensive industries (like the food industry) feed electricity into the Danish grid.

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emission allowances at the end of each reporting year. Second, a department manages the physical electricity sales and purchases. The demand for CO2 emission allowances is calculated and purchased according to the amount of electricity that was sold on the forward market. Third, a power trading department is responsible for trading financial products and serves “as a bank to the whole organization” (Power trader of a big Danish energy provider, 2008-09-01). All company divisions calculate their positions themselves (e.g. gas, electricity, CO2) and then trade those positions into the central power trading department. Surplus is sold, demand is bought. The power-trading department then trades those positions into the global/ European commodity markets. That means that the managers at the power generation plants need – like the small Danish district heating plant – to make a decision on a daily basis whether to produce electricity or not. This is based on a price prognosis, the power generation capacities, and cost calculations. CO2 has come as an additional factor that is included into the daily decisionmaking procedure on running or not running an installation the next day. Via the daily make-or-buy decision, electricity-generating companies decide on the ‘cheapest’ way of generating electricity, which is not automatically the ‘cleanest’ way. Principally, that means that coal and nuclear based electricity production is the most favoured. If the emission of one ton of the greenhouse gas CO2 is not costless any more, burning fossil fuel is less attractive from an economic point of view. Still, the daily make-or-buy decision and any possible CO2 reduction effect is linked to the electricity generation capacities in the electricity market. The case studies presented here are part of the Scandinavian (Denmark) and the Continental European (Germany) markets. The Danish electricity market depends very much on natural circumstances like rain in Norway and Sweden (hydroelectric installations) and wind in Denmark (windmills). In case of heavy weather (rain and wind), the electricity price declines and the conventional carbon-based power plants generate less energy. The German electricity generation, on the other hand, depends very much on the coal price due to its large capacity to generate electricity in coal-fired plants. If the coal price is low, German coal-fired power plants generate more electricity. More than 50% of the verified CO2 emissions in Europe stem from the four big German energy suppliers RWE, E.ON, Vattenfall Europe and EnBW (Schafhausen 2006: 4). Additionally, the German withdrawal from the nuclear energy programme (Atomausstieg) through the social-democratic/green coalition leads to a support for coal-fired energy-production. That means that the steering effect of the market in terms of environmental performance depends on the ‘clean’ and ‘dirty’ capacities that a national economy provides. With the introduction of the EU ETS, the burning of fossil fuels should have become more expensive. This implies that electricity-producing companies have to decide, on the basis of their technological capacities, which installation to run and (if technologically possible) which fuel to burn. The steering effect of the EU ETS should therefore, theoretically, lead to a shift towards burning ‘cleaner’ gas instead of ‘dirty’ coal. However, this decision-making process on the company level not only depends on the price for CO2 but also on the price for coal, gas and on the weather. We will now present a calculation that has been made within a power-providing

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company. The decision-makers at the German municipal utility B systematically addressed the question of a fuel switch for their own installation park. They came to the conclusion that the price constellation (gas, coal, CO2) is not supporting the switch from coal to gas. The reaction we had on CO2-trading is basically the fuel switch from coal to gas, because of CO2 reasons. We HAVE the possibility to do that in our co-generation plant. We never USED it, BECAUSE coal plus CO2 was still cheaper than gas and CO2. That’s why we have theoretically the opportunity in our plant, also in plant XY, yet we never engaged it, because it never was, it has been estimated so many times, it never paid off financially to switch from coal to gas. [. . .] Or let’s say it like this, the price of gas isn’t low enough, or the price for coal isn’t high enough. Therefore one of the prices isn’t right. (Power trader of the German municipal utility B, 2008-01-15, translated)

The environmental steering effect of the EU ETS unfolds as a by-product of economic calculations at the company level.

1.4

Investment Decisions

This chapter is on “sustainable innovations” in terms of investments in CO2 reducing technologies at the company level. While make-or-buy decisions and fuel switch decisions imply price observations at power-trading departments, there is another form of reducing CO2 emissions: the reflexive, extensive, and longterm investment in innovations. We will discuss technological and organisational innovations and their link to emissions trading. We ask how ‘sustainable innovations’ can be directly attributed to the companies’ participation in the EU ETS in our case studies. We found that concrete CO2 reduction measures have been implemented due to high energy costs (e.g. gas prices) or have been implemented because of other state policies (e.g. energy efficiency agreements with the Danish government), but hardly due to the companies’ participation in the trading scheme.

1.4.1

Technological Innovations

In our quantitative survey (Engels et al. 2008) we asked whether companies invested in technological solutions to reduce CO2 emissions. Less than one fourth of the responding companies of the German energy sector said so. In Denmark, about one third of the responding energy providers claimed investments in CO2 abatement measures towards the end of Phase I. In both countries, however, the majority of the responding energy providers did not invest in CO2 reduction measures during Phase I of the trading scheme. Drawing from the case studies we gain a more detailed picture of the potential link. In the Danish district heating plant, the CO2 emissions abatement was achieved via a technological innovation in the year 2006. In this case, the CO2 emission reduction was a side effect of an investment which saved a lot of money.

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The district heating plant invested in a new flue gas heat exchanger, due to high gas prices. Rising gas prises and the Danish CO2 tax were the decisive factors for this investment decision. The impact of the EU ETS was only marginal. The calculated extra cost per unit of gas caused by the tax has been 10 times higher than the calculated extra cost caused by emissions trading. This calculation points at the necessity for a high price for burning carbon to make investments into cleaner technology attractive from an economic point of view. In terms of ‘sustainable innovations’ the Danish energy tax (also called CO2 tax) had another advantage. The energy engineer of the Danish fish meal factory points out that the company had been investing in cleaner technology earlier because of the Danish so-called ‘Voluntary Agreements on Energy Efficiency’ that had been established in the aftermath of the discussions on climate change mitigation in 1996. These agreements are linked to CO2 tax rebates and thus provide an incentive for the companies to invest in energy efficient technologies. Furthermore, a large share of the tax revenues was used for energy efficiency measures. Companies could apply for a fund to enhance their energy efficiency. Additionally, the state provided a portfolio of standard measures that could easily improve energy efficiency. We DID several projects and got also money for several projects. [. . .] The biggest project was that we bought a new evaporator. [. . .] It was driven by actually waste-heat, the earlier we had, we had to supply energy for it. So just by using this single evaporator, we could save 20% of our total energy. [. . .] And we had some money for it from this fund that was based from the carbon tax. We also made some smaller investment. We changed some motors and changed some faints, some smaller things. It was more standard. (Energy engineer of the Danish fish meal factory, 2008-06-11)

The case of the Danish fish meal factory points to the fact that money which is spent on buying allowances in the EU ETS is not necessarily directed into carbon abatement measures. The Danish state fund, on the other hand, gave the government the possibility to support companies to improve their CO2 performance. The money that is traded at European energy exchanges or via traders and brokers cannot be channelled along political priorities. Another example of a ‘sustainable innovation’ has been planned under the socalled ‘Project-based Mechanisms’. The environmental manager of the German municipal utility A organised carbon abatement projects in South America to generate Certified Emissions Reductions (CERs) that could be used and traded in the EU ETS. His personal interest was not to generate allowances, but to develop projects which have a positive effect on the environment. The project was well advanced to the point that all required letters of intent and the agreements with investors had been collected. But then the price for CERs dropped due to the financial crisis and the projects had to be put on hold. The CDM [Clean Development Mechanim] projects which have either been taken over or the CDM projects which were profitable because of other reasons and were CDM was sort of mounted upon; they have a chance of being realisable. But everything else doesn’t. [. . .] After July, the CO2 prices went principally downhill. [. . .] We were ready but the financial crisis intervened. The investor told us to wait a little. And during our waiting prices kept falling. [. . .] You would need an investor calculating with 18 [to establish an environmental

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suitable project] [. . .] and now you can work with 7, at the highest, if you include a distribution of risk, which is. . . That’s just a huge difference. (Environmental manager of the municipal utility A, 2009-02-10).

This example shows the dependence of CO2 emissions reduction planning on high prices and price stability. The CO2 price of the EU ETS unfolds in a rather volatile and incalculable way (Convery and Redmond 2007). Long-term planning processes for ‘sustainable innovations’ involve various actors and financial and technological planning. A volatile CO2 price development makes such calculations a rather uncertain process. In Phase I, the significant over-allocation with emission rights induced a price drop; and in the beginning of Phase II, it was the global financial crisis that caused an unforeseeable price drop. One of the main characteristics of a technological innovation is its planning dependency, which is threatened by instable and unforeseeable price developments. Emissions trading is seen as a major political instrument for reducing CO2 emissions, but the market volatility might become an obstacle to long-term investments in ‘cleaner’ technologies.

1.4.2

Organisational Innovations

Organisational innovations are another possibility to look for ways of improving a company’s CO2 performance. We will discuss environmental management systems as an organisational innovation. Environmental management systems aim at committing a company’s employees to evaluate, manage and to improve the respective environmental and/or energy-efficiency performance.7 The implementation of such an organisational innovation does not automatically lead to a better CO2 performance. Such management systems could lead to ‘green washing’, but they could also lead to the visualisation and thus to an addressability of environmental problems, or to substantial environmental improvements. In Denmark, the government supported such systems at the company level via its ‘Voluntary Agreements on Energy Efficiency’. In Germany, the energy providers opposed the idea of industry-wide environmental management and audit systems. They negotiated with the German government against such a regulation in favour of voluntary agreements. There were overall three industry commitments. The first was broadly recognised and signed. The second one, the kind of PRETTY controversial one, that was with the 25 percent reduction until 2005, the one with this specific value. And there’s a protocol notice from the government in which is stated that the government, on the other hand, if the industry signed this commitment, would dispense with the so-called energy audit. This energy audit resulted from a recommendation in the EU’s White Paper, which should be converted into national law. And that’s when the energy providers suddenly felt a strong panic rise. And that resulted into this horse-trading. (Environmental manager German municipal utility A, 2008-04-23, translated)

7 For the sociological discussion on accounting and the environment see Hopwood (2009); Lohmann (2009); Engels (2009).

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Environmental management systems are thus much more common in Denmark than in Germany. Despite this general opposition, one of the German municipal utilities in our study implemented such a system. As a consequence of this, the utility’s CO2 emissions were documented even before the EU ETS started in 2005. The system works like an ecological controlling, maybe a bit more, because we ourselves are the developers. Not only do we control, but we naturally want to encourage and help. This means that the ecological programme yearly pursued by us, with I’ll say between fifteen and forty measures invoked by us, will be coordinated with the ones responsible. Afterwards the implementations are almost all watched over. [. . .] There’s money in that. (Environmental manager of the German municipal utility A, translated)

In 1996, the Danish malt producer implemented an energy management system that focuses on energy efficiency. Since then, the company has invested a lot into energy efficiency measures. If you make an agreement for energy management, which we have had since the beginning, than you can save most of that CO2 tax. [. . .] Energy saving agreement, today it’s called the energy management. So DOS 24 and 3, that’s the standard. [. . .] Then you have to set up some targets for energy savings, you have to have a company coming in, going through. We had that several times, but also have some specialists coming in, saying here and here and here you can do some savings, and then you make like an ISO system. You make some programmes, and then we have had more than 100 programmes, more or less. So it’s been good for us, because we have actually saved quite a lot of energy. And at the same time, we don’t have to pay this tax. So we have focused, have HIGHLY focused on energy. [. . .] It’s also a big money question. (Managing director of the Danish malt producer, 2008-06-10)

With respect to the questions on how the emissions trading system affects decisions on CO2 emissions reductions, the manager of the company answered: We don’t plan in CO2 we plan in energy reductions. (Managing Director of the Danish malt producer, 2008-06-10)

Energy management systems usually are combined with some kind of external control but also with expertise on energy efficiency potentials. The Danish fish meal factory also profited from the consultancy that is provided if a company joins the voluntary agreements on energy efficiency (see chapter on technological innovations). In these cases the ‘good’ CO2 performance depended on the interplay of price signals (high energy costs), financial incentives (reduction of the CO2 tax), the input of consultancy and know-how, and a regular documentation (control) of the progress. This demonstrates that a company’s CO2 performance may also depend strongly on social, legal, and organisational factors, like institutionalised decision-making tools. The topic of ‘accounting for carbon’ and thus the internalisation of the CO2 abatement at the organisational level is a vital one, due to the fact that the emission of one ton of the greenhouse gas CO2 got a price. Projects like the Carbon Disclosure Project (Carbon Disclosure Project 2009) and auditing companies (PWC 2009; ACCA 2009) develop and distribute tools for accounting for carbon. Such developments are the consequence of a price building mechanism. Furthermore, they show that the simple fact that CO2 is not priceless any more is not easily transformed into organisational carbon calculations. The internalisation of external

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costs via prices is a rather complex undertaking that has to be managed and made manageable first. Moreover, the cases at hand indicate that a trading system is not the only way to foster institutionalised ways of accounting for carbon. Still, the expectation of a price may foster the economic calculation of something that was not represented in business decisions at all.

2 Quintessence The path towards a so-called ‘low carbon society’ may be pursued by adopting various mechanisms, technologies and regulations. This article examined the EU ETS and its potential linkages to a company’s ‘CO2 performance’, with a special focus on the energy sector. The question was how and to what extent economic actors transform the price signals from CO2 trading into company-level CO2 reduction measures. This paper is based on qualitative case studies and does not argue at the aggregate macro-level of the ‘cap and trade’ system. It aimed to shed light on 4 levels at which CO2 trading possibly constitutes a link with the CO2 performance of a power company: (1.) the allocation mechanism, (2.) the CO2 trading decisions, (3.) the make-or-buy decisions in the electricity market, and (4.) technological and organisational innovations. In general, we found that the link between CO2 trading and the CO2 performance is rather weak and depends on several organisational and institutional circumstances that are external to the CO2 market. (1) Several companies in our case studies criticised the missing link between the allocation process and their CO2 performance. The allocation of cost-free allowances in Phase I and Phase II depends on the emissions in a baseline year, so that companies get punished for a temporarily low capacity utilisation (maybe due to a plant revision), or get rewarded for a temporarily high production (maybe due to high electricity prices or the production cycles that depend on the appearance of fish in the North Sea). It has been claimed that the allocation had nothing to do with a ‘good’ CO2 performance of a company. The problems of the allocation procedure ‘grandfathering’ are well known. Especially the ‘wind-fall profits’ of the electricity sector are an anathema to the European Commission. For any post 2013 agreement, the Commission claims on its website that “[a]uctioning of allowances will be the rule rather than the exception. No allowances will be allocated free of charge for electricity production, with only limited and temporary options to derogate from this rule” (European Commission 2009). For a free allowance allocation, the Commission aims at ‘benchmarking’ instead of ‘grandfathering’ and at overcoming the problems of heterogeneity and comparability of industrial processes. “From 2013 onwards allowances for the industry and heating sector “will be allocated for free based on ambitious (greenhouse gos performance-based) benchmarks” (European Commission

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2011). At the level of the allocation of allowances, the missing link between the emissions trading scheme and the CO2 performance of a company is to be solved in the third Phase of the trading scheme – after 8 years of testing and trying. (2) The EU ETS explicitly aims at flexibility and the micro-level decisions of economic actors. The question of reducing CO2 emissions is delegated to the level of the firm, where rational economic actors are supposed to calculate their CO2 abatement costs. The price mechanism of demand and supply (the ‘invisible hand’) will then unfold its steering effect: any CO2 reduction measure is steered by a company’s economic calculation. Concrete CO2 trading decisions show us that CO2 emission rights are assets that decisionmakers can use for many purposes. The virtual assets can be used to enhance a company’s liquidity or budget management, for the purpose of revenuemaking or even for an investment in climate change mitigation measures. In our case studies we found companies which tended to solve financial problems or generate financial gains from the carbon market instead of investing in climate change mitigation measures. (3) The fact that CO2 carries a price has an effect on the calculations of economic actors in the electricity sector, where the price signal is quasi automatically transformed into the daily decision of making or buying electricity. The liberalisation of the European electricity market, with its spot and forward trading of electricity contracts, is a context that is flexible enough to react on daily price developments in the CO2 market. Price volatility, here, is fairly unproblematic for decision makers. Still, it is unclear to what extent such market-based planning on electricity generation (that includes a price for CO2) unfolds a steering effect towards emission-reduction measures. Generally, a pure price effect does not privilege a ‘clean’ electricity generation in the first place; it privileges ‘cheap’ electricity generation. Even though we found that the price signals from emissions trading were not strong enough for our case study company to encourage a fuel switch from ‘dirty’ coal to ‘cleaner’ gas, emissions trading made the company calculate its CO2 abatement costs. This is important, as we know from our quantitative survey that about two thirds of all responding companies did not know or did not know well their own CO2 abatement costs in Phase I (Engels 2009: 492; Knoll and Huth 2008: 84). We conclude from the case studies that putting a price on carbon at least makes the electricity companies calculate CO2 – which is a precondition for reducing CO2. (4.1) For long-term investments in technological innovations price-volatility matters a lot. Technological investments are grounded on a long-term planning security, which is threatened by the volatility of the CO2 price. Technological investments involve various players that have to cooperate for a certain time-span (investors, technological experts, company managers). To keep those parties on track, the (price) basis of the cooperation should not differ too much. We discussed three concrete investments that show the planning dependability of technological innovations. We found that a

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constantly high price for burning fossil fuels fosters investments for a better CO2 performance. The Danish CO2 taxes, e.g., gave a price signal and secured a long-term planning. Another factor influencing technological innovations is the available expertise on green technologies. The ‘carbon industry’ (Voß 2007) that emerged with the introduction of the EU ETS harbours a growing number of experts. It would be interesting to assess the relative importance of financial and trading experts compared to technological experts (who can bring about the technical innovations which are necessary for lowering the emissions after all). At length, tax revenues – other than traded emission rights – could be used to support companies to improve their CO2 performance. (4.2) With reference to organisational innovations we asked how the EU ETS could link up to environmental or energy management systems. The debate on ‘accounting for carbon’ pushes the idea of internalising external costs at an organisational or management level. Book-keeping and risk management, so it is assumed, provide a necessary starting point for dealing with carbon in an institutionalised way. Some of our case study companies had environmental or energy management systems implemented even before the EU ETS was launched. For the Danish malt producer, e.g., energy consumption was such a big cost factor that energy-reduction planning became a central management issue. From the manager’s point of view, the CO2 trading scheme is not coupled with the CO2 performance of the company and did not contribute to its performance at all. We conclude from our case studies that emissions trading has a potential to trigger sustainable innovations in the electricity sector, but that the EU ETS might have realised this potential to a disappointing extent only. In accordance with the literature listed in the introduction, one reason for this missing link is the price of the CO2 allowances that has been too low and too volatile to provide an economic incentive strong enough to be felt along with the price of gas or coal. The price volatility of the allowances might push the companies to invest in financial risk management strategies rather than in the physical reduction of energy consumption or in CO2 abatement technologies. If we only look at the price level, the conclusion is obvious: emissions trading and sustainable innovations are loosely coupled at best. However, the case studies reveal more complex (potential) linkages. In particular, they demonstrate the many ways in which book-keeping and environmental or energy management are necessary preconditions for carbon abatement strategies at the company level. Price signals do not simply allow for an economic decision-making, but have to be translated by calculative tools into incentives for sustainable innovations. In line with this reasoning, the most important and most valuable effect of the EU ETS might be that companies started to develop these tools and are more and more able to account for carbon. In the long run, however, only measurable CO2 emission reductions will count as an indicator for an improved CO2 performance.

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References ACCA (2009) Emission rights accounting. association of chartered certified accountants. London. http://www.accaglobal.com/documents/tech-tp-cjb_emission.pdf. Accessed 12 Dec 2009 Barker T, Haoran P, K€ ohler J, Warren R, Winne S (2006) Decarbonising the global economy with induced technological change: scenarios to 2100 using E3MG. Energ J 27:143–160 Carbon Disclosure Project (2009) Global 500 report. On behalf of 475 investors with assets of US $55 trillion. https://www.cdproject.net/CDPResults/CDP_2009_Global_500_Report_with_Industry_ Snapshots.pdf. Accessed 14 Dec 2009 Convery F, Redmond L (2007) Market and price developments in the European Union Emissions Trading Scheme. Rev Environ Econ Policy 1:88–111 DeCicco JM, Geller HS, Morrill JH (1993) Feebates for fuel economy: market incentives for encouraging production and sales of efficient vehicles (T921). American Council for an Energy-Efficient Economy, Washington D.C Detken A, L€oschel A, Alexeeva-Talebi V, Heindl P, Strunz M (2009) CO2 barometer. Leaving the trial phase behind – preferences & strategies of German Companies under the EU ETS. KfW Bankengruppe, Frankfurt am Main. http://www.kfw.de/DE_Home/Service/Download_Center/ Allgemeine_Publikationen/Research/PDF_Dokumente_CO2_Barometer/ Barometer2009_Internet.pdf_-_Adobe_Acrobat_Professional.pdf. Accessed 14 Dec 2009 Edquist Ch (ed) (1997) Systems of innovation: technologies, institutions, and organizations. Pinter, London Ellerman AD, Buchner B, Carraro C (eds) (2007a) Allocation in the European Emissions Trading Scheme: rights, rents and fairness. Cambridge University Press, Cambridge Ellerman AD, Buchner B, Carraro C (2007b) Unifying themes. In: Ellerman AD, Buchner B, Carraro C (eds) Allocation in the European Emissions Trading Scheme: rights, rents and fairness. Cambridge University Press, Cambridge, pp 339–369 Engels A (2009) The European Emissions Trading Scheme: an exploratory study of how companies learn to account for carbon. Acc Organ Soc 34:488–498 Engels A, Knoll L, Huth M (2008) Preparing for the ‘Real’ market: National Patterns of Institutional Learning and Company Behaviour in the European Emissions Trading Scheme (EU ETS). Eur Environ 18:276–297 European Commission (2009) Auctioning. http://ec.europa.eu/environment/climat/emission/ auctioning_en.htm. Accessed 10 Dec 2009 European Commission (2011) Benchmarking. http://ec.europa.eu/climat/policies/ets/benchmarking_ en.htm. Accessed 15 July 2009 Fischer C (2005) Technical innovation and design choices for emissions trading and other climate policies. In: Hansj€ urgens B (ed) Emissions trading for climate policy. US and European Perspectives. Cambridge University Press, Cambridge, pp 37–52 Garud R, Karnøe P (2003) Bricolage versus breakthrough: distributed and embedded agency in technology entrepreneurship. Res Policy 32:277–300 Grubb M, K€ohler J, Anderson D (2002) Induced technical change in energy and environmental modelling: analytic approaches and policy implications. Annu Rev Energy Env 27:271–308 Hopwood A (2009) Accounting and the environment. Acc Organ Soc 34:433–439 Knoll L, Huth M (2008) Emissionshandel aus soziologischer Sicht: Wer handelt eigentlich wie mit Emissionsrechten? UmweltWirtschaftsForum 16:81–88 Kruger JK, Pizer WA (2004) Greenhouse gas trading in europe: the grand new policy experiment. Environ 46:8–23 Kuik O, Mulder M (2004) Emissions trading and competitiveness: pros and cons of relative and absolute schemes. Energy Policy 32:737–745 Lohmann L (2009) Toward a different debate in environmental accounting: the cases of carbon and cost-benefit. Acc Organ Soc 34:499–534 MacKenzie DA (2009) Material markets: how economic agents are constructed. Oxford University Press, Oxford

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Metz B, van Vuuren D (2005) How, and at what costs, can low-level stabilization be achieved? An overview. In: Schellnhuber H-J, Cramer W, Nakicenovic N, Wigley T, Yohe G (eds) Avoiding dangerous climate change. Cambridge University Press, Cambridge, pp 337–346 Michaelowa A, Butzengeiger S (2005) EU emissions trading: navigating between Scylla and Charybdis. Climate Policy 5:1–9 Neuhoff K, Keats K, Sato M, (2006) Allocation, incentives and distortions: the impact of EU ETS emissions allowance allocations to the electricity sector. Cambridge Working Papers in Economics 0642, Faculty of Economics, University of Cambridge PWC (2009) Typico plc. Greenhouse Gas Emissions Report. An illustration for business climate change and greenhouse gas emissions reporting. http://download.pwc.com/ie/pubs/pwc_green house_gas_emissions_report2009.pdf. Accessed 12 Dec 2009 Schade W, Jochem E, Barker T, Catenazzi G, Eichhammer W, Fleiter T, Held A, Helfrich N, Jakob M, Criqui P, Mima S, Quandt L, Peters A, Ragwitz M, Reiter U, Reitze F, Schelhaas M, Scrieciu S, Turton H (2009) ADAM 2-degree scenario for Europe – policies and impacts. Deliverable D-M1.3 of ADAM (Adaptation and Mitigation Strategies: Supporting European Climate Policy). Project co-funded by European Commission 6th RTD Programme. Karlsruhe, Germany Schafhausen F-J (2006) Emissionshandel – Start frei zur zweiten Runde. Z Energiewirtschaft 30: 3–30 Schwarz M, Birke M, Beerheide E (2010) Die Bedeutung sozialer Innovationen f€ur eine nachhaltige Entwicklung. In: Howaldt J, Jacobsen H (eds) Soziale Innovation: Auf dem Weg zu einem postindustriellen Innovationsparadigma, Wiesbaden, VS Stankeviciute L, Kitous A, Criqui P (2008) The fundamentals of the future international emissions trading system. Energy Policy 36:4272–4286 Svendsen GT (1999) The idea of global CO2 trade. Eur Environ 9:232–237 Tonn B, Martin M (2000) Industrial energy efficiency decision-making. Energy Policy 28: 831–843 Voß J-P (2007) Innovation processes in governance: the development of ‘Emissions Trading’ as a New Policy Instrument. Sci Public Policy 34:329–343

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Microgeneration in the UK and Germany from a Technological Innovation Systems Perspective Barbara Praetorius, Mari Martiskainen, Raphael Sauter, and Jim Watson

1 Introduction Microgeneration, the production of electricity at the level of individual buildings or small local communities, has recently enjoyed increasing attention from politicians and energy analysts. A more decentralized or distributed electricity generation system could contribute to a transition towards a more sustainable energy system. Compared to the traditional electricity system based on fossil fuels and nuclear energy, microgeneration can in many circumstances reduce carbon dioxide (CO2) emissions when it replaces fossil fuels by renewable fuels, and also by increasing total efficiency through the combined generation of heat and power in small cogeneration units. In addition, generation of power close to the point of use could reduce power transport over long distances and thereby increase the overall efficiency of the electricity system and reliability of power supply. Finally, microgeneration can increase consumers’ choice about their energy provision and potentially improve overall competition (Pehnt et al. 2006). Microgeneration is in conformity with the prevailing economic free market paradigm and the successive liberalisation of European electricity generation and distribution markets. Due to the limited size of microgeneration investment, it may also activate new electricity generators on the local and regional level to enter the market, such as local utilities, other local actors, and even private households with electricity generating units (sometimes called prosumers).

B. Praetorius (*) Research Affiliate, DIW, Berlin, Germany M. Martiskainen • R. Sauter • J. Watson SPRU, University of Sussex, Brighton, UK D. Jansen et al. (eds.), Sustainability Innovations in the Electricity Sector, Sustainability and Innovation, DOI 10.1007/978-3-7908-2730-9_7, # Springer-Verlag Berlin Heidelberg 2012

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Microgeneration comes in various forms and different stages of technological development and market introduction. Micro wind or water turbines and solarpowered photovoltaic (PV) cells produce electricity, while micro combined heat and power (microcogeneration or micro-CHP) units provide both electricity and heat, usually fuelled by natural gas. The EU cogeneration directive defines micro cogeneration as “a cogeneration unit with a maximum capacity below 50 kW of electricity (kWe)” (Art. 3(m)) (EC 2004). Most microgeneration units, however, are much smaller as houses or apartment buildings mostly need less than 15 kWel (Pehnt et al. 2006), the definition which we therefore apply in this chapter. The same capacity range applies to electricity only microgeneration technologies, although they are typically around 2 kWel if installed in individual dwellings. Despite these expected benefits, deployment of microgeneration is only slowly taking off, and it differs with national contexts. For example, approximately 110,000 electricity and heat generation units have been installed in the UK, most of which use solar thermal technology, while only 7,300 are producing electricity (Element Energy 2008b). Meanwhile almost one million units – albeit minor in their total contribution to energy supply – have been set up in Germany, mostly PV. Against this background, the purpose of this chapter is two-fold. We first explain why this group of energy technologies has hitherto not been able to enter energy systems more broadly in either country. Second, we explain the apparent dissimilar deployment dynamics in both countries. From this we draw conclusions for policy provisions required for successful innovation paths. Previous research on microgeneration has mainly focused on individual national contexts, aiming to analyse national barriers and suggest necessary policy and regulatory changes (Pehnt et al. 2006; Watson et al. 2008). A comparative analysis permits a deeper understanding of the factors that have helped or prevented the uptake of such technologies (Bergek et al. 2008). We build on the technological innovation systems (TIS) approach, which presupposes that new technological systems with potent functions around an assortment of new energy technologies need to materialize when a transformation of the energy system is to take place (Jacobsson and Bergek 2004). For the development of an innovation system, powerful and effective forms of societal organisations are a fundamental precondition. Actors, networks and institutions have an important role in initiating change: without the flexibility of actors and institutions, combined with pushes through (external) crises and challenges, change will rarely take place. We look at these structural components and, by assessing the functionality of the German and UK innovation systems, we provide new insights into the functions of TIS and the structural and procedural factors that enable or inhibit their emergence and reinforcement. The remaining chapter is structured as follows. Section 2 will concretise the TIS functions framework as applied to the case studies in Sect. 3 (the UK) and Sect. 4 (Germany), both concluding with a discussion of blocking and inducing mechanisms in each country. In the final Sect. 5, we derive conclusions for governance strategies and discuss the usefulness of the proposed framework.

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2 Analytical Framework Innovation is linked to novelty. It is not restricted to technological artefacts but also happens on institutional, policy-related, behavioural, or organisational levels. Carlsson and Stankiewicz (1991) proposed the concept of technological systems for describing innovation processes. They define technological systems as “network (s) of agents interacting in a specific technology area under a particular institutional infrastructure for the purpose of generating, diffusing, and utilising technology” (Carlsson and Stankiewicz 1991: 94). The innovation functions approach put forward by Jacobsson and Bergek (2004; Bergek et al. 2008) is based on a similar definition of innovation systems but stresses the functional requirements – preconditions and dynamic features – of a successful technological innovation system. Based on an investigation of structural characteristics and the core functions of a technological innovation system, analysis of the driving forces and blocking mechanisms can be performed. This helps to derive structural and functional policy goals and measures to improve the conditions for development of the TIS. The framework is also well suited for the comparative analysis of emerging TISs (Bergek et al. 2008). In the following sections, we aim to understand these dynamics for the case of an emerging technological knowledge field. We are interested in understanding the dynamics of the diffusion of small-scale distributed electricity generation including renewable and non-renewable technologies (such as gas-based micro-CHP). With regard to their energy input and the type of technology, small-scale renewables and cogeneration units may be seen to belong to different technological knowledge fields. However, they challenge the structural components of the established electricity system in similar regards, which is why we chose to delineate the system boundaries respectively. First of all, a broad roll-out of such small-scale sources of electricity generation, some of which are intermittent, challenges the existing grid infrastructure. Technologically, the grid integration of small-scale sources on the level of buildings or apartment blocks requires grid operators to deal with two ways of electricity flow instead of the present one-way system with a few large base load power plants. Economically, the variability of many microgeneration installations has implications for the economics of larger base load power plants. Many large coal and nuclear power plants are neither economically nor technically designed for fast response to changes in demand and supply. Even in cases where such large-scale plants do provide significant flexibility, the advent of mass market microgeneration may lead to greater demands being placed upon them – or their successors. If future fossil fuel plants are fitted with carbon capture and storage technologies to reduce their emissions, the increased costs of operating flexibly (rather than on baseload) are likely to be higher. Secondly, with regard to actors and their networks, a broad diffusion of distributed generation technologies would challenge the long-established network of large power utilities dominating the market. New actors may emerge in large numbers, as distributed technologies are potentially run by new or small power

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producers such as home owners, apartment proprietors, local utilities and the like. Institutionally, the implicit paradigm of a centrally organised, regulated electricity supply system may become obsolete when a multitude of small-scale generators is to be managed to guarantee secure and stable electricity supply. Yet the structural characteristics of an emerging group of technologies like micro electricity generation are difficult to grasp – actors, networks and institutions are emerging together within the TIS. Therefore, identification of “early” actors – pioneering firms, venture capitalists, new associations, universities and research organisations or interested public bodies and their formal and informal networks – constitutes the starting point for mapping the TIS and the functions to analyse the dynamics within the TIS. The seven functions that have found to be relevant in previous studies are knowledge development, influence on the direction of search, entrepreneurial experimentation, market formation, legitimation, resource mobilisation and external economies (Bergek et al. 2008). Table 1 summarises these functions and the associated empirical indicators we apply in this chapter (see also the contribution by Negro and Hekkert in this volume). In the remaining chapter, we will apply this framework to identify and compare the structural and functional characteristics of the emerging microgeneration TIS in the UK and Germany. Only few statistical or secondary data are available for the case studies. We therefore base the analysis on expert interviews, website and document analysis and available data from ministries and associations. For Germany, the analysis is also based on earlier studies for the case of micro cogeneration (Pehnt et al. 2006; Praetorius et al. 2009). About 30 semi-structured interviews were conducted in the time period 2006–2009; earlier studies on the TIS for renewable electricity technologies (Jacobsson et al. 2004; Jacobsson and Lauber 2006) provided additional insights. For the UK, the analysis builds on an earlier study on domestic microgeneration in the UK (Watson et al. 2008), for which

Table 1 Functions and indicators for the analysis of an emerging TIS Function Indicator Knowledge development R&D projects, activities of industry associations, websites, and diffusion conferences, linkages among key stakeholders Legitimation

Public interest/acceptance, governmental statements, activities to align institutional setting

Influence on the direction of search

Visions and beliefs in growth potential, press coverage, planning legislation, regulatory pressures and policy targets

Entrepreneurial experimentation

New entrants, diversification of activities of incumbents, number of different types of applications

Market formation

Number, type and size of markets; customer base; actors’ strategies; other drivers such as institutional stimuli, purchasing processes etc.

Resource mobilization

Capital; skills

Development of external Knowledge flows; political power; legitimacy/resolution economies of uncertainties Source: Adapted from Bergek et al. (2008)

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20 semi-structured interviews were conducted in 2006–2008. Both case studies also draw upon long-term observations by the authors.

3 The UK TIS for Microgeneration Microgeneration as a concept has received an increasing amount of interest from UK policy makers, industry and consumers alike in the last few years. Policy makers have taken to microgeneration as a way of diversifying the UK’s energy supply, while many consumers have been attracted by the opportunity to generate their own electricity amidst rising energy prices and concerns about climate change. Early pioneers of the UK microgeneration sector included actors such as academics, research and development organisations and companies, some of which are still operating today (e.g. Marlec 2009; Proven Energy 2009). For instance both RenewableUK (formerly the British Wind Energy Association)1 and the Solar Trade Association (STA) were established in the late 1970s and have advocated microgeneration to some extent since. The government bodies Energy Saving Trust and the Carbon Trust have funded and managed several field trials of various microgeneration technologies. However, the UK’s microgeneration market diffusion has been slow and the market is still in its infancy. Some microgeneration companies also entered the market with much hype, only to end up winding down their operations after only a few years (Bain 2009). There were only around 110,000 microgeneration units installed in the UK in 2008 (BERR 2008; Element Energy 2008a).2 Micro-CHP technologies have also been the focus of a lot of attention by developers, though these technologies have been slow to develop (see Table 2).

3.1

Structural Components

The dominant institutional context of the emerging UK microgeneration TIS is the liberalised energy market structure. The UK’s energy market liberalisation began in 1990 and competition was introduced in stages. Retail electricity supply competition was completed in 1998 (Toke and Fragaki 2008) and a year later, in 1999, customers were given the right to switch their energy supplier with 4 weeks’ notice. This ‘28 day rule’ was later abolished. Another important institutional feature was the separation of supply businesses from low voltage electricity distribution businesses (owned by Distribution Network Operators or DNOs) in 2000. This led

1

BWEA’s name changed to RenewableUK in March 2010. Energy policy in the UK is now handled by the Department of Energy and Climate Change (DECC), which was created in October 2008. Prior to that energy policy was with the Department for Business, Enterprise & Regulatory Reform (BERR). BERR is now the Department for Business, Innovation & Skills (BIS), created in June 2009. 2

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Table 2 Estimations of installations for different microgeneration technologies compared to modelled uptakes for new build housing in 2016 Technology Annual UK Cumulative UK Predicted baseline 2016 annual installations installations in system installations for new build in 2006 2008 (from modelling) PV 460 2,993 220,000 Wind (small and micro) 105 (upper estimate)

2,323

35,600 (circa 7,800 medium and 27,800 micro)

Micro-CHP (all types)

no data

1,000

68,000 (includes fuel cells)

Gas fired CHP (not including micro-CHP)

<29

Approx 1,000

4

Solar water

3,050

97,000–102,000

13,000

Ground source heat pumps

280

3,415

470 (includes air source and community installations)

1,400 (this figure is 528 for boilers only (includes micro, medium and large scale) for stoves and boilers) Source: Element Energy and EST (2007): 94; Element Energy (2008a, b) Biomass boilers

170 (boilers only)

to some increased attention on distributed generation and related institutional and technical issues. Furthermore the UK energy market is characterised by high connectivity of dwellings to the gas network (>80%) and the virtual absence of district heating systems in towns and cities. Strong competition in electricity retail markets resulted in low margins for energy suppliers and sparked interest in new business opportunities. However, the aforementioned 28 day rule acted as a barrier to innovation by energy suppliers as they were reluctant to introduce new products in a market where customers were able to easily switch their energy supplier (Littlechild 2006). This may have been one factor that slowed the extension of energy service offerings from commercial and industrial consumers to householders. Options such as the leasing of microgeneration technologies, and the recovery of the costs via long term contracts with household consumers did not emerge in the market. Despite the lack of incentives for microgeneration within the liberalised electricity market, UK energy policies have added some momentum to such low carbon technologies. As climate change has gained increased public, scientific and governmental interest, there has been a clear political objective to reduce carbon emissions, with a primary focus on electricity generation (RCEP 2000; Stern 2006). The UK government has adopted targets for reducing greenhouse gas emissions by 50% between 2023 and 2027 (compared to 1990 levels) and 80% by 2050. Energy security concerns have also gone up the UK policy agenda – partly due the perceived threats to security posed by the decline of domestic oil and gas resources. These drivers were also reflected in wider EU energy policy dynamics that focused strongly on energy security and climate change (Sauter and Grashof 2007). In particular, the binding EU-target for a share of 20% of renewable energy

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sources by 2020 included a very ambitious national target of 15%. This, in turn, has led to a strengthening of UK renewables policy – including the introduction of stronger incentives for microcogeneration of electricity from renewable sources and plans to support renewable heat on a small scale. The wider use of the term ‘microgeneration’ to mean small scale low carbon generation in the UK can largely be linked to the establishment of the Micropower Council in 2004 and its high media profile. The Micropower Council is the lobbying organisation of the UK’s microgeneration sector. It has played a central role in the formation of networks in support of microgeneration and is well connected with representatives of the main political parties in the House of Commons. Its nearly 50 members include small developers, large incumbent energy suppliers, boiler manufacturers, and large retailers. It is associated with a number of other industry organisations such as RenewableUK (542 members of which 22 companies are building and installing small wind energy),3 the Solar Trade Association (189 members with some 90 in PV)4; and the Renewable Energy Association (1,200 members, of which 603 are involved in microgeneration).5 Another relevant network is the Associate Parliamentary Renewable and Sustainable Energy Group (PRASEG), which is a cross party group for UK politicians and senior industry stakeholders promoting sustainable energy issues in Parliament and the wider political community.

3.2

Functional Dynamics

The development and diffusion of technical knowledge for the UK microgeneration sector has largely been based on RD&D funding for energy research and microgeneration allocated by the Department of Energy and Climate Change and UK Research Councils. Funding available for energy research, development and demonstration (RD&D)6 significantly decreased after liberalisation and privatisation in the early 1990s (MacKerron 1994). Yet since around 2002, it increased again, in particular for renewable energy technologies. Altogether, the UK spent €82 million on renewable energy RD&D in 2008, of which €22 million (up from €1 million in 1998) was granted for PV (Fig. 1). However, liberalisation has hindered long term innovation in the UK electricity sector, as private sector R&D investment has fallen since liberalisation. Jamasb and Pollitt (2008, 2009)

3

www.renewable-uk.com. Personal communication with Solar Trade Association, 18/11/2009 5 Personal communication with Renewable Energy Association, 18/11/2009. 6 In general, public RD&D spending is difficult to measure with accuracy. This is due to different interpretations by different bodies and/or countries about which activities fit with the scope of RD&D. Reporting of figures to international bodies such as the International Energy Agency rarely cover all RD&D spending. For example, spending by the Carbon Trust (a public body) is excluded. 4

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Fig. 1 Energy RD&D spending in the UK, 2008. (Source: IEA 2008) Million Euro (2008)

400 350 300 250 200 150 100 50

19 90 19 92 19 94 19 96 19 98 20 00 20 02 20 04 20 06 20 08

0

Total Energy RD&D Renewable Energy Sources Total Solar Energy Photovoltaics

argue that this has been the case mainly because focus has shifted to short term customer orientated R&D projects rather than long term strategy. As a main funding tool, the Technology Programme (replacing the New and Renewable Energy Programme in 2006) initially allocated £15 million (€17,4 million)7 to low carbon energy and £12 million (€14 million) to energy efficiency technologies. While most of this funding has been allocated to large scale projects, some also went to microgeneration options such as PV and micro-CHP. Climate change objectives were also important in the legitimation of microgeneration as policy option. The first UK Climate Change Programme for example mentioned micro-CHP as one potential contribution to reduce carbon emissions from energy supply (DETR 2000). Later government documents on the future of the UK’s energy supply mix also referred to distributed generation and included the publication of a Microgeneration Strategy (DTI 2006). However, the civil service resources allocated to the implementation of the Microgeneration Strategy in 2006 – initially only one civil servant – led to questions about the internal legitimacy of microgeneration within government. Opinion polls taken in the UK between 2000 and 2005 also reflected a generally supportive attitude towards microgeneration (McGowan and Sauter 2005). Lobbying organisations such as the Micropower Council contributed to increased awareness and acceptance of microgeneration. Several research studies underlined this message (Collins 2004; Greenpeace 2005) and field trials for instance in microwind and CHP were funded by the government (Carbon Trust 2007; EST 2009).

7

Calculated with an average exchange rate (May 2010) of 1.16675 EUR per one British Pound.

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As for market growth estimates, the Energy Saving Trust identified a huge market potential for microgeneration in the UK. Up to 30–40% of UK’s electricity demand could be met by microgeneration technologies by 2050 (Energy Saving Trust 2005). Recent modelling also confirms a strong growth potential (see Table 2). Yet a major problem for legitimation is the lack of evidence that technologies will deliver. Micro wind will only provide sufficient output to pay back investment costs at very good wind sites and not in many urban areas (Watson et al. 2008). Another study concluded that if 10% of households installed micro wind, this would provide no more than 0.4% of total UK electricity consumption (Carbon Trust 2008). For micro-CHP, initial results from trials showed ambiguous results about carbon savings (Carbon Trust 2007). However, actual installation rates for microCHP have remained rather static and even declined – and the technology has not progressed beyond this trial stage. In 2004 there were 482 CHP units of less than 100kWe installed in the UK, while in 2008 this figured had dropped to 462 (DECC 2009a). While the UK government supported microgeneration in some documents, it failed to set precise targets which would have influence on the direction of search of companies and consumers. Even the overall CHP target – which said that 10 GW should be installed by 2010 – was dropped. Another potential influence came from liberalisation of the retail market: Up to 80% of UK households changed their electricity or gas supplier since 1999 (Ofgem 2008). Combined with low retail margins, liberalisation thus forced suppliers to search for new ways to establish longer-term customer relationships and new business opportunities. Domestic energy service contracts for microgeneration technologies, building on boiler service networks as established by most energy utilities, were considered as one option to achieve this. The abolition of the 28 day rule in 2007 removed one important regulatory barrier for this to happen. However, the prevailing business model of the incumbent energy suppliers remains based on bulk supply of electricity and gas. Despite small regulatory changes (such as a reduced VAT rate for microgeneration of 5% instead of 17.5%, or simplified grid connection procedures) various barriers inhibited the diffusion of microgeneration technologies in the UK (Watson et al. 2008). Examples include planning regulations, the complexity of the main economic instrument designed to support renewable energy (the Renewables Obligation) and unattractive prices paid for electricity fed into the grid. Some of these shortcomings were addressed in 2008, when microgeneration became part of the Carbon Emissions Reduction Target (CERT), the UK’s energy supplier obligation on energy efficiency measures. Furthermore, the Micropower Council and trade associations lobbied for microgeneration to have ‘permitted development’ status under planning regulations. This now means that most householders do not need specific planning permission from their local authority before they install micro-generation in their home. The Microgeneration Strategy helped to identify the institutional challenges but failed to address them successfully. The continuing slow progress with microgeneration deployment demonstrated that further policy support measures would be required for a successful diffusion (Element Energy 2008a).

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The degree of entrepreneurial experimentation and new entrants varies between the different microgeneration technologies. While the micro-CHP market has been dominated by incumbent players including long-established energy utilities, micro renewables such as solar and wind are dominated by new entrants. Both British Gas and E.ON UK’s subsidiary Powergen have developed or contracted micro-CHP designs. Both were initially based on a Stirling engine technology and there is only limited competition in technological variety (for example, wall-mounted unit vs. floor-mounted unit; different heat to power ratios). British Gas stopped development work on their micro-CHP product and are emphasising a longer-term project to develop a fuel cell-based system with Ceres Power, a university spin-off company. The UK PV market has both incumbent actors such as BP and Shell and smaller companies such as Solar Century. The micro wind sector is almost exclusively dominated by small companies experimenting with a considerable range of different turbine designs and sizes, though some of these have formed alliances with major energy suppliers and other prominent firms. For example, grant funding applications for micro wind turbines increased significantly after ‘Windsave’ micro wind turbines became available at the do-it-yourself chain “B&Q”. Central to their initial success was their coordinated action across different technologies instead of an early focus on one single technology. In terms of market formation, the UK microgeneration market is at a very early stage in particular in electricity generation, and it has mostly been driven by public grant programmes. Most of these have been delivered by central government, though in some cases local governments have offered their own, more modest grant schemes as a supplement to those in place nationally. In 2005, the UK domestic micro-renewables market (excluding micro-CHP) had an estimated annual turnover of around £17 million (€19.7 million) (Energy Saving Trust 2005, p. 24). But all PV and most biomass installations were subsidized by government. For example, the Major Photovoltaic Demonstration Programme launched in 2002 run until 2007 and provided £31million (€36 million) of funding. Also, the Clear Skies programme was launched in 2003 with a budget of £12.5million (€14.5 million) for micro electricity and heat (Hansard 2006). Both programmes were replaced by the Low Carbon Buildings Programme (LCBP) in 2006, supporting microgeneration investment with a total budget of £46 million (€53.4 million) for phase 1 and with grants for up to 50% of the installation costs in Phase II (LCBP 2010a, b; DECC 2009b). The budget increased in subsequent years: in 2009, the total funding under the programme was £131 million (€152 million). However, the way in which the LCBP was implemented caused considerable problems for both consumers and microgeneration firms. The imposition of monthly quotas and frequent changes in rules led to a ‘stop and go’ approach. At one point in its early phase, the LCBP ran out of funds for household installations (REA 2006). The LCBP programme ended abruptly in May 2010 following the election of a new Coalition government. This programme was one of several caught by an initial wave of spending cuts designed to reduce the size of the UK’s very large budget deficit.

Microgeneration in the UK and Germany from a Technological Innovation Systems Table 3 UK feed-in tariff levels for different microgeneration technologies

Energy source Size Hydro 15 kW Micro-CHP <2 kW Solar PV 4 kW new build Solar PV 4 kW retrofit Solar PV >4–10 kW Wind 1.5 kW Wind >1.5–15kW Source: FITARIFFS (2010)

Generation tariff (£pence/kWh) 19.9 10.0 36.1 41.3 36.1 34.5 26.7

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Before April 2010 – when a new system of feed-in tariffs were introduced to support micro-generation – most energy suppliers paid for electricity from microgeneration on a voluntary basis linked to a supply contract. In theory, microgeneration installations also received two Renewable Obligation Certificates per MWh under the Renewables Obligation. However, the levels of take up of this incentive have been very low due to the complexities involved. The implementation of feed-in tariffs for microcogeneration from April 2010 has the potential to strengthen market formation very significantly. Table 3 summarises feed-in tariff levels for different microgeneration technologies. This type of market instrument has been successful for instance in Germany as explained in Sect. 4 of this chapter, and has already led to a lot of activity amongst incumbent utilities and new firms offering financed microcogeneration ‘packages’ to householders. It remains to be seen whether the feed-in tariff will counter the effects of the financial crisis and recession which have tended to make UK householders much more cautious about investments of this kind. The economics of microgeneration have also been boosted by soaring domestic energy bills. For example, electricity bills increased by 45% (gas bills by 71%) between 2003 and 2006 (Ofgem 2006). The typical cost of an annual combined ‘dual fuel’ gas and electricity doubled between May 2004 and November 2008 when costs peaked. Costs have since declined slightly. Strong legitimacy and high levels of public funding had an impact on resource mobilisation. The positive image of microgeneration in the public debate attracted incumbent energy suppliers to invest capital, in order to benefit from positive image effects and to position themselves in a potential future business field and new retail products. British Gas concluded an agreement with the rooftop micro wind developer Windsave (which subsequently was declared insolvent in 2009). Scottish and Southern Energy invested in the major PV manufacturer Solar Century and in the micro wind turbine manufacturer Renewable Devices. Another important resource is the skills needed for implementing new technology. In the UK, energy utilities could build on their installers’ network for boiler servicing. Yet insufficient skills were reflected in low numbers of accredited installers for units approved under the Microgeneration Certification Scheme: by June 2008 just over 400 installers were accredited for the whole of the UK.

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Altogether, the UK microgeneration TIS creates very little positive externalities: There are some regular conferences dealing with related issues, so that some information and knowledge flows exist. Yet the overall success of the TIS has not been great. It remains to be seen whether the new feed-in tariff for microgeneration will have more impact.

3.3

Summarising Inducement and Blocking Mechanisms

The UK TIS for microgeneration has seen some new networks with a pivotal role e.g., the Micropower Council. Legitimation is high in principle, the liberalised energy market with its low margins plus high switching rates encouraged suppliers to consider new business opportunities including microgeneration. However, blocking mechanisms are strong, in particular in terms of institutional adjustments and political will. This can be seen from the hesitancy to implement the Microgeneration Strategy, from low levels of public funding and also from the lack of action, despite a declared will to support distributed energy systems. Interestingly, micro-CHP was at the centre of networking and lobbying activities in the early stages, backed by major incumbents such as energy utilities. Small solar and wind aligned to this network later. Partly this can be explained by cumulative causation in the context of firm-specific knowledge and skills: MicroCHP was promoted early by well-established energy utilities, building on their service networks and micro-renewables benefitted from this. This shows that one specific technology may play a central role in establishing such a TIS, and despite failing to reach a wider market, prepared the ground for domestic microgeneration in general.

4 The German TIS for Microgeneration Until the early 1990s, the German microgeneration sector consisted of a handful of small firms and idealists installing PV panels. Since then, many technologies have exposed impressive sales growth rates. Today, micro electricity generation technologies implemented in Germany in individual households mainly comprise of roof-mounted PV systems and micro-CHP. Small Stirling engines also entered the market in 2008, while micro wind turbines have a very small share. The analysis for Germany is focused on grid-connected PV systems (which account for more than two thirds of total PV installations in Germany) and micro cogeneration units. The overall share of these generation units in total electricity supply is still small, yet Germany is an interesting showcase of a successful market introduction programme for innovative energy technologies.

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Structural Components

In terms of the institutional framework, and in contrast to the UK, liberalisation of the German electricity market only started in April 1998. From then on, grid access was organized by a so-called “negotiated third-party access” rule. However, new power producers had to negotiate the conditions of every single grid connection, a situation which lasted until the implementation of the German electricity regulator in 2005. Initially, only renewable micropower benefitted from an obligation to connect small-scale renewables to the grid and to remunerate them – micro-CHP was included much later. Jacobsson and Bergek (2004), Jacobsson et al. (2004) and Jacobsson and Lauber (2006) give a detailed account of the underlying success story of network formation and lobbying for a feed-in remuneration for renewables since the late 1980s. The demise of nuclear energy after Chernobyl, the 1987 Brundtland report and the results of a first Enqueˆte Commission of the German Bundestag on “Provisions for protecting the Earth’s atmosphere” in 1990 fuelled visions of a renewable energy future, which cleared the way for the Feed-in Law (1991), followed by the Renewable Energy Sources Act 2000 (with some revisions since, the last in 2011). The Feed-in Law was the most important institutional alignment for micropower in Germany; it formed the starting shot for a renewables boom. Renewable technology producers soon formed strong networks with the Green party and organized themselves in a number of associations. Today, renewables benefit from considerable administrative capacities: the Federal Ministry for the Environment employs a whole branch with multiple divisions responsible for renewable energy issues. The number of firms and associations active in producing components of renewable energy in Germany has increased enormously since. An official website of the German Ministry for the Economy lists 116 German companies in the solar energy sector (including solar thermal panels), the German Solar Energy Society (Deutsche Gesellschaft f€ ur Solarenergie, DGS) counts more than 130 solar panel producers and over 10,000 companies in total (including trade, installation and suppliers) active in this area. The German Association of Solar Industries (BSW 2009) has over 700 members and has been in existence since 1979. In addition, there are diverse initiatives close to the German Ministry of the Economy, such as the “Export Initiative” of the German Energy Agency “Dena”. The diffusion of micro cogeneration technologies also developed momentum – but only in the early twenty first century. Initially, only two companies – Senertec and PowerPlus – were offering small-scale cogeneration units. No association existed, except for some informative websites connecting appliance producers and installers (such as www.minibhkw.de). Micro cogeneration was mostly perceived as the ‘little brother’ of cogeneration in general. This was an advantage: a powerful lobby of large cogeneration producers (in particular a large number of local utilities with district heat systems) managed to initialize a bonus programme and law for electricity from cogeneration in 2000 (CHP law, amended in 2002).

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At the same time, and thanks to an equally powerful fuel cell lobby, other smallscale cogeneration technologies also benefit from these laws. Other institutional alignments include standards and procedures for grid connection and financial support from the Federal Ministry for the Environment. The number of actors in the field has since been increasing in both the energy supply and the equipment industries. According to the ASUE,8 an association of 44 German gas suppliers dedicated to sustainable energy consumption (based on natural gas), about a dozen companies now build such “electricity-generating boilers” appropriate for individual houses. At the same time, an increasing number of local utilities started offering micro-CHP to its customers as an alternative to standard boilers. To sum it up, the analysis of structural components shows well developed formal and informal networks for renewable energy technologies, whereas fossil-based systems of small cogeneration are still in an early phase of network appearance.

4.2

Functional Dynamics

The development and diffusion of knowledge forms the heart of any TIS. In fact, the German federal R&D policy was very successful in initiating the creation and advancement of formal knowledge in PV. This was also a result of generous R&D funding. According to the IEA, Germany spent €109.8 million for R&D in renewable energy in 2008, out of which €37.5 million was for PV. Back in 1995, PV received some €33 million. R&D support also prompted an increasing number of research institutes and pioneering start-up firms to participate in research networks and conferences to develop design options. Equally, the number of websites and networks grew, as well as presence at technology fairs. Wafer-based, crystalline and thin film technologies are manufactured and installed in increasing numbers in Germany, with respective effects on the learning curves. Recent accounts by the German Solar Energy Society show that system cost went down to 3,000 Euro per kW peak – from 15,000 Euros in the late 1980s (Hartmann 2009). Micro-CHP, by comparison, was not so much in the focus of public R&D support, except for fuel cells (Pehnt et al. 2006). As a result, to date, two design options of reciprocating engines dominate the market (the Senertec ‘Dachs’ and the PowerPlus ‘Ecopower’). Further technologies, in particular small Stirling engines, have been available only recently, while fuel cells still wait for their commercial production. Renewable energy enjoys a high level of legitimacy in Germany: Chernobyl, the climate change debate, and the upcoming scarcity of fossil fuel resources led the process of legitimation with a high level of public concern. This became articulated

8 ASUE (Arbeitsgemeinschaft f€ ur sparsamen und umweltfreundlichen Energieverbrauch) is a working group for an economic and environmentally sound energy use.

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in the form of pressure from parliament, as well as interest and lobbying groups (Jacobsson and Lauber 2006). In 2010, the German government increased its targets for renewable electricity, to 35% in 2020 and 80% in 2050 (Bundesregierung 2010). In the case of cogeneration, micro-CHP has only lately been explicitly considered part of a future vision of climate-friendly energy provision in Germany. Larger plants for district or industrial heating applications are generally of higher political and economic interest, including local utilities which have to balance their portfolio of large and small-scale CHP in their respective local context. Similarly, public acceptance for renewable energy has been comparatively high, while there is no information to be found on micro-CHP except for the case of fuel cells. The high level of public attention, policy and financial support schemes explains much of the dynamic development of the TIS: PV is now widely recognized to be financially attractive for both PV panel producers and panel owners. Even after recent discussions about the level of feed-in tariffs, the incentives are continuous and thus strong enough to influence the direction of search for investment and application opportunities for PV installations. Political signals – in the form of the Feed-in Law and investment support programmes from the Federal Ministry for the Environment – directed increasing attention to microgeneration units, with a similar – albeit not as strong – effect for the direction of search of potential market entrants. The political and institutional framework fuelled entrepreneurial experimentation comparatively early for PV. In fact, the industry is booming, and stock market valuations for PV technology firms are at a comparatively high level. The number of firms producing PV cells has increased continuously since the mid 1980s (Jacobsson and Lauber 2006); only in the late 2000s, increasing competition from other PV producing countries (such as China) started to threaten the local equipment industry. In the case of micro-CHP, the number of companies and designs remained small for a long time. The pioneering firms soon entered into a phase of active mergers and consolidation. In 2002, Senertec was acquired by the British Baxi Group (originally a fuel cell developer). In 2009, Baxi merged with De Dietrich Remeha (a Stirling developer, formerly Microgen) to form the “BDR Group”. PowerPlus, was taken over by Vaillant, a large boiler company, in 2004, hoping to benefit from their established distribution system. The cooperation between traditional boiler companies and micro-CHP manufacturers seems to be promising, as micro cogeneration plant is often marketed as a boiler that also produces electricity. Such a marketing strategy simplifies the deployment of micro-CHP – consumers are informed about micro-CHP plants easily when they need to replace a boiler. Eventually, in late 2007, some international suppliers entered the market, offering engine-based micro-CHP units including small Stirling units. Here, a number of local utilities also takes the chance to enlarge their product portfolio, offering micro-CHP to their customers. Altogether, the most successful driver of market formation for renewable energy has been the feed-in tariff scheme: by providing guaranteed and attractive longterm income for renewable electricity fed in to the national grid it created a strong

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and stable demand. The Renewable Energy Act of 2000 also determines that renewable energy must be connected to the grid and electricity generated by these units has priority to other generators. As a result, electricity generation from renewable energy more than tripled between 1999 and 2008 (from 30 to 93 TWh), and the share of renewable electricity reached 15.1% in 2008 (BMU 2009). Yet this was mostly accounted for by large hydro and wind power, despite the increase in microgeneration. The cumulative capacity of PV, for example, grew from 2 MW in 1990 to 5,877 MW in 2008, but PV still contributed only some 0.7% to total electricity consumption (Fig. 2). Micro-CHP installations have also increased: all in all, about 24,000 units were installed in 2009. Market leader Senertec has promoted its 5.5 kWel ‘Dachs’ since 1996 and produced its 20,000th unit in September 2009. PowerPlus ventured 3 years later into the market with a 1.3–4.7 kWel ‘Ecopower’ reciprocating machine; however, it has not yet been able to copy the Dachs’ success. Reliable sales numbers for Stirling technology are not yet available. The market has started to take off, albeit not as much as in the case of renewables (Fig. 3). The first (2000) and second (2002) CHP laws oblige grid operators to connect all CHP installations and buy their electricity. However, other than in the case of renewable energy, feed-in remuneration and CHP bonus payments for micro-CHP do not cover costs and are volatile as they are coupled to the power exchange. The eventual success of the 2008 Federal Environmental Ministry investment subsidy scheme remains to be seen, especially since the government elected in 2009 announced to stop it. Reconsidering these observations with regard to their power to mobilise resources for the TIS, effective legitimation processes and substantial RD&D resources had a strong impact on the PV market. Kick-started by two major

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investors (Shell and ASE) in 1998, public financial flows for market introduction and feed-in tariffs attracted investment capital for production sites (Jacobsson and Lauber 2006). As a result, distribution and marketing structures are well developed, with numerous information sites and services, and large amounts are continuously invested in new production sites. By comparison, external investment capital came in much later in the case of micro-CHP, and the technology pioneers Senertec and PowerPlus developed the market on their own. Substantial outside resources only arrived when both technology developers, similar to a number of fuel cell developers, were purchased by other boiler or CHP technology firms. A side effect of the successful networking in the case of renewable energy technologies was the creation of economic externalities: information on technologies and funding is broadly available and reduces uncertainty. Even microCHP is now increasingly standardized, and search, information, connection and total installation costs are decreasing. This trend is also supported by the network of service companies that quickly developed around the micro cogeneration appliances industry and were financially fuelled by the CHP laws and support programmes for micro generation from the Federal Environmental ministry from 2008 on. Also, different information platforms were founded and offered information about installation and financial support, among them the above-mentioned ASUE for the gas industry.

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Finally, micro electricity generation also benefits from a general trend towards low-risk investments and sustainable forms of energy supply. For reasons of acceptance, long-term economics and climate protection, large-scale investments in, e.g., coal or nuclear plants are increasingly associated with high risks. This may offer a window of opportunity for a broad roll-out of small-scale generation units in Germany.

4.3

Summarising Inducing and Blocking Mechanisms

Small-scale electricity generation is on the rise in Germany. The most important incentives for this are strong networks among local energy suppliers, the equipment industry and politicians, and a reliable and advantageous remuneration scheme for electricity from small-scale sources. Small (and also large) renewable energy technologies are well ahead in terms of market formation, while micro-CHP technologies have been increasingly successful with recent changes. This is due to the delay in support programmes and highlights the importance of programmes to reduce uncertainty in emerging TIS. The early institutional alignment, high levels of legitimation and the related public financial support in the case of renewables induced entry of many new firms into the TIS, thus also resulting in variety and experimentation and in a substantial move down the learning curve. Renewables enjoy a high degree of social acceptance, lobbying, networking and have a strong advocacy coalition (associations, MPs, Green Party). As a result of successful support programmes, renewable energy technologies lived up to expectations and have even gone beyond them. Vice versa, this “success story” motivated government actors to go beyond their initial targets and to announce ambitious targets. This self-reinforcing process may even lead to a substantial change in the system, as the integration of fluctuating renewable electricity into a reliable electricity system is only partly compatible with large-scale and inflexible fossil or nuclear power plants. Micro-CHP has only slowly started to gain similar momentum. The summer 2009 announcement by Lichtblick, an electricity and gas supplier, to build a virtual power plant, may have been the first step to change the picture substantially. Lichtblick announced to build a virtual grid of 20 kWel cogeneration units with reciprocating engines fuelled with natural gas (www.lichtblick.de). With a target of 2,000 MW of installed capacity, Lichtblick aims at exactly the market niche arising from the policy targets for renewable energy: the supply of power available in shortest terms and needed for stabilising the electricity grid in a world of increasingly fluctuating electricity sources. It remains to be seen whether this approach will become a role model for future investments in electricity generation.

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5 Comparison and Discussion of the Country Case Studies The comparative functional analysis of the UK and German TIS for microgeneration reveals quite different functional dynamics in both countries strongly influenced by rather different structural features. Table 4 summarises our findings for the two countries.

Table 4 Performance of the microgeneration TIS in Germany and UK Function Performance of German TIS Performance of UK TIS Knowledge PV: high performance PV: low but increasing performance development Highly dynamic, generous R&D, R&D funding from dedicated and diffusion major universities & research government programme, universities institutes, conferences, websites, and research institutes, associations networks and networks Micro-CHP: low but growing Micro-CHP: low but increasing performance performance Almost no R&D apparent, little Initial R&D funding for field trials attention in conferences or research, no from government, associations and associations networks Legitimation

PV: high performance/Micro-CHP: late but increasing performance Renewables in the focus of politics, high level of public acceptance, increasing attention for distributed “local” energy, standard procedures for grid connection and remuneration

Influence on the PV: high performance direction of search Targets for renewable energy, feed-in law since 1991, connection priority Micro-CHP: medium – growing performance Bonus since 2000, investment support since 2008 Entrepreneurial PV: high performance experimentation Many new entrants, activities of variation to reduce production cost of PV panels

PV: medium performance Some policy focus, support from the public, accredited installers, trade associations Micro-CHP: high performance Micro-CHP mentioned as part of renewables policy, attention from energy utilities, interest in distributed generation, trade associations, public interest PV: low performance/Micro-CHP low performance Lobbying from trade associations, but no formal targets. Reduced VAT rate, inclusion in the CERT

PV: high performance Several companies operating, many new entrants but also established energy companies, strong links to trade associations Micro-CHP: growing performance Micro-CHP: low performance Market dominated mainly by Increasing number of entrants, diversification (Stirling, reciprocating, established energy utilities, little competition etc.) in last couple of years (continued)

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Table 4 (continued) Function Performance of German TIS Market PV: high performance formation Exponential growth rates due to reliable funding as major incentive for producers and users of PV panels Micro-CHP: low but growing performance Increasing sales numbers and brands with standardisation of procedures and financial stimuli Resource mobilization

PV: high performance Attractive for investors Micro-CHP: low but growing performance Little venture capital, mergers and distributors increasingly forming up

Development of PV and micro-CHP: good performance external economies In both cases, spill-over from ICT, selfreinforcing mechanisms of public approval, increasing deployment, cost reductions, reduced uncertainties Source: own compilation from case studies

Performance of UK TIS PV: medium performance Steady increases in installations within the UK market, affected by ‘stop-start’ funding programmes Micro-CHP: low performance Limited number of installations New feed-in tariffs may have a greater impact PV: medium performance/MicroCHP: medium performance Capital investment from energy utilities, relatively low number of accredited installers

PV: high performance/Micro-CHP: medium performance Reinforced lobbying network for microgeneration, introduction of feedin tariffs, public interest, increasing installations

First, a key driver in both the UK and Germany was the level of legitimation reflected in governmental statements and targets as well as strong social acceptance of microgeneration technologies. In the UK, however, this was not backed up by public RD&D funding to influence the direction of search or (at least until the recent introduction of feed-in tariffs) by sufficient market formation through the stimulation of sufficient demand among households both of which could have stimulated high market growth expectations. Despite the recent developments in energy and climate change policy, the UK microgeneration market lags considerably behind Germany. By contrast, German RD&D funding was high and provided a clear direction of search. Together with the feed-in scheme, this set off a substantial demand for renewable technologies and an early entry of new actors in the form of developers and companies. Second, the energy market institutions and structures were initially more favourable for the emergence of a microgeneration TIS in the UK than in Germany. The competitive market with its low retail margins and high switch rates pushed companies to search for new business opportunities, which might have included microgeneration. In practice, this effect turned out to be rather limited. The lack of competition in the German electricity market initially hindered a similar search process. Yet, while this – in the UK – resulted in initial resource mobilisation

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among incumbent players in the case of micro-CHP, it was not sufficient to foster a sufficient level of momentum across the system functions. In Germany, by comparison, the situation for new market entrants improved increasingly with the revision of feed-in laws and increasing political pressure for more competition in the electricity market. This progressively mobilised capital and investments in microgeneration by private households, and by many local energy suppliers. The analysis has provided new insights not only on the functional dynamics within a TIS but also among different TISs. The German TIS for renewable energy technologies is characterized by very powerful lobbying and advocacy coalitions with links to both industry and political parties supported by a strong scientific community. Here, a well-functioning TIS for renewable energy technologies came into place early, and micro-renewables were largely covered under this TIS. As a specific characteristic of the German case, micro-CHP developed in a CHP TIS, separate from renewable microgeneration technologies. To sum it up, the focus of policy support programmes for distributed generation in Germany clearly lies on renewable technologies, and not on distributed generation as such. By contrast, in the UK the lack of a well-established TIS for renewable energy technologies enabled the emergence of a microgeneration technology with microCHP as the incubator technology supported by incumbent players. This is despite the limited deployment of this technology in practice and is due to the fact that most households are connected to the gas grid and incumbent players offer domestic boiler service contracts in combination with gas fuelling the boiler. In principle, micro-CHP fits well into this structure and firm-specific knowledge and skills base. As a consequence of successful lobbying and a good image of microgeneration in general, energy suppliers were attracted into this market. This interest was eventually extended to other microgeneration technologies. Whilst there has been limited success in the diffusion of microgeneration in the UK, the success in terms of institutional alignment is reflected in the recent introduction of feed-in tariffs. These may, in turn, lead to an acceleration of deployment.

6 Conclusion In this chapter, we looked at the development of microgeneration in Germany and the UK. We applied the TIS framework to understand and compare the dynamics of the emerging TIS for microgeneration in the two countries. While microgeneration appears to belong to one homogenous TIS in the UK with one technology (microCHP) paving the way for the others, it is split into two different TIS in Germany. There, the “renewable” and the “micro-CHP” TIS appear to be linked only by the fact that both are small in scale. The comparison of UK and Germany here shows that a TIS may exist in one country within different system boundaries than in the other, i.e. depend on the local context more than on the technology itself. In both countries, the economic paradigm of liberalisation is the one most important structural component for small-scale generation to enable access to the

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electricity system at all. Moreover, microgeneration represents an opportunity to enter the competitive electricity market with little total investment risk. In Germany, for example, an increasing part of the more than 900 local utilities build small-scale renewables or offer micro-CHP units to their customers, instead of investing in large scale power plants. Yet the analysis also clearly shows that grid access rules are not sufficient for investments. In fact, the comparison shows that without continuity as offered by the German feed-in schemes since 1991, investments are slow, in spite of declarations of political will on national or regional levels. It remains to be seen how successful the new feed-in scheme in the UK will be. All in all, the results of the comparative analysis confirm the need to set clear priorities in energy innovation policy if a functional TIS is to develop, i.e. new technologies developed and deployed (Watson 2008). Feed-in tariffs for microgeneration technologies in the UK and a financial support programme for microCHP in Germany (albeit halted in 2010 due to a government budget crisis) indicate new governmental priorities in this area and can provide a higher level of legitimacy for these technologies – an important input for the direction of search and market formation. Acknowledgements We gratefully acknowledge funding from the German Ministry for Education and Research (BMBF) and from the UK Economic and Social Research Council. We would also like to thank the reviewers and colleagues who commented on previous drafts of this chapter.

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Innovation and Diffusion of Renewables and CHP in the UK: Regulation and Liberalisation Gordon MacKerron

1 Introduction This paper attempts to explain the broad policy context that has conditioned the rather limited extent of growth in renewable energy and CHP in the UK over the last 20 years. While the paper in this volume by Praetorius, Watson and Sauter concentrates on microgeneration, this paper looks at larger-scale versions of renewables and CHP. Pursuit of competition in electricity and gas markets could in principle lead to a range of different technological outcomes, depending for example on policy commitments, utility structures, regulatory rules and public funding of particular technologies. Of particular importance to the evolution of renewables and CHP in the UK have been three contexts

2 Context 1: Electricity and Gas Reform The UK was a leader in the reform of the gas and electricity industries. The initial political impetus was firmly privatization rather than liberalisation, where liberalisation is defined as the introduction of competition. When gas was privatized in 1986, a public sector monopoly was sold as a single entity into private ownership. Motivations were several, but pre-eminent among them was a desire to raise revenue for the Thatcher Government without needing to raise taxes, and a strong political commitment to creating a ‘share-owning democracy’.1 This created pressure from the new private owners for profitable outcomes that had not always been powerful among the more complex objectives pursued in public ownership.

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The British Electricity Experiment, Earthscan 1996, Section 1, pp. 3–63.

G. MacKerron (*) SPRM (Science and Technology Policy Research), Freeman Centre, University of Sussex, Brighta BN1 9RE, UK D. Jansen et al. (eds.), Sustainability Innovations in the Electricity Sector, Sustainability and Innovation, DOI 10.1007/978-3-7908-2730-9_8, # Springer-Verlag Berlin Heidelberg 2012

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However the process of privatization had been strongly influenced by academic economists of a broadly ‘Austrian’ conviction2 and while they did not believe in ‘perfect’ competition, they certainly favoured competitive pressures as a route to better economic efficiency. In addition, wider political pressure developed within the Conservative party to introduce processes of competition as well as private ownership. This led to heavy regulatory pressure on the new British Gas Corporation as well as strenuous efforts to create conditions for new entrants into gas markets. When it came to the turn of the electricity industry to be privatised in 1989–90, these new pressures ensured that the electricity industry was treated very differently from gas.3 In England and Wales virtually the whole industry was privatized and in addition • The state monopoly generation and transmission company (CEGB) was split vertically, with a new transmission company and the generation assets split initially into two companies (eventually three, when it became clear that nuclear power could not be privatized on acceptable terms and a new state nuclear-only company was also formed) • The 12 state-owned Area Boards, whose previous function had been monopolistic low-voltage distribution and retail supply had their local distribution monopolies retained but there were two important changes. First, the Regional Electricity Companies (RECs), as the Boards were re-named, were now allowed to enter generation, but – second – their monopoly over local retailing was gradually removed over the period to 1999, at which point all retail consumers had a choice of supplier. • A new economic regulatory agency was set up (OFFER). It had a principal duty to promote competition in generation and retailing as a safeguard for consumer interests. Its main day to day business was however controlling the allowable revenues (and hence prices) that the monopoly transmission and distribution companies could charge for use of the networks. A fair summary of energy policy between 1990 and around 2003 is that it was dominated by the aggressive pursuit of competition and cost-cutting, and effectively delivered via the (initially) two regulatory bodies of OFFER and OFGAS, later merged as OFGEM. This meant that there was limited attention to environmental objectives, which policy-makers tended to view as ‘environmental constraints’ on economic efficiency.4 The environmental dimension of energy policy largely involved compliance with the EU Large Combustion Plant Directive and later the Kyoto Protocol of the

2 For example, Professor Stephen Littlechild, who subsequently became the first Director-general of OFFER. 3 S. Thomas, ‘The privatization of the electricity supply industry,’ in J. Surrey, op. cit. pp 40–63. 4 G. MacKerron, ‘Organisation and regulation of the electricity supply industry in the United Kingdom,’ in L. de Paoli (ed.) The Electricity Industry in Transition, Francoangeli (2001), pp. 529–583.

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UNFCCC. In this latter case, the fortunate – market-driven – large-scale substitution of gas for coal in electricity generation in the 1990s meant that Kyoto did not materially affect energy policy. Since 2003, energy policy has paid much more attention to climate change issues and energy security,5 against a backdrop of continuing priority given to competitive energy markets. This more recent attention to wider objectives – especially low carbon – has led to a stronger policy promotion of renewables in particular. However the context of pre-existing structures and policy styles has constrained the success of this more recent effort, and the single most important factor has been the long-established and continuing high degree of centralization in UK energy policy and energy delivery, given that highly centralized systems find it difficult to deal with small-scale diffuse technologies. The historic legacy in the UK before privatisation and liberalisation was a high degree of centralization. Post-World War II reforms, leading to the formation of the CEGB in 1957, meant that there was a single monopoly generator and transmitter of electricity. There was no serious local or regional opposition to this: there was no regional political structure, and at the local, municipal level there was only a limited pre-1945 tradition of local generation. While large local authorities like London had some earlier local tradition of generation, most municipalities in England and Wales were (and are) small, and had little local capacity to engage in electricity supply. 6 England and Wales contain several hundred municipalities, many of them serving quite small populations, and all of them are heavily dependent on financial grants from central Government. The new de-integrated structures from 1990 might have offered more scope for growth in local or regional activity – a structural change that could have favoured renewables and CHP. The legal changes certainly made more small-scale and local initiatives possible. Thus the CEGB monopoly on generation was broken; network charges could not discriminate against small generators; and retailing electricity was now open to any company fulfilling minimal requirements. Over time, more favourable rates for small generators selling into the network were also established. And it might have seemed likely that the Regional Electricity Companies (the revamped Area Boards) could have provided a springboard for sub-national activity in renewables and CHP, given that they were now free to engage in generation. However the centralized tendency of energy policy was not interrupted by the reforms of 1990. First of all, there was a national wholesale electricity market (the ‘Pool’) modelled closely on the old CEGB system, into which all electricity had to be sold. Second the two private generators, National Power and PowerGen had enormous market power in generation and implicitly colluded. Third the RECs’ interest in generation was to escape the market power of the big generators and they consequently built relatively large and cheap combined cycle gas plants. Their other main interest was in electricity retailing, where they were allowed to compete outside their

5

DTI, Our Energy Future – creating a low carbon economy, Cm. 5761, February 2003. L. Hannah, Electricity before Nationalisation, Macmillan, 1979.

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home region and this national level of activity became a major preoccupation. It is also important to recognize that the RECs, while regionally based and responsible for regional distribution, did not correspond to any regional political structure - they represented geographical convenience, not regional identity, and hence there were no political forces external to the RECs encouraging them to develop local initiatives. RECS were also part of an open capital market: they have been bought, sold and consolidated, so that only 5 companies now own the 12 RECs. Where new companies were established in generation, they were either very small (and generally unsuccessful) or aimed to operate at national scale. The present market structure is that well over 95% of all generation is in the hands of six large companies, all of them aiming to sell to all parts of the country, with retailing dominated by the same companies.

3 Context 2: The Poor History of Public R&D Funding in the UK Energy R&D directly funded by Government from the 1960s onwards was dominated by attempts to develop and commercialise advanced forms of nuclear power, primarily fast breeder reactors and nuclear fusion. These absorbed very large amounts of public money and resulted in abandonment of the fast reactor and ever-lengthening estimates of the time it might take to develop commercial fusion.7 Consequently when the Thatcher administration from the early 1980s sought ways radically to reduce public expenditure, public sector R&D was an obvious target. In addition, the newly privatized energy and gas companies, under shareholder pressure to cut costs, also substantially reduced their R&D budgets. By the mid-1990s therefore public and (newly) private expenditure on energy R&D had fallen by an order of magnitude compared to the 1970s. In this context, there was minimal public funding of renewables R&D, at just the time when a new effort might have seemed appropriate.

4 Context 3: Faith in Market Mechanisms and Aversion to ‘Picking Winners’ The liberalizations in the energy industries in the 1980s and early 1990s were part of a more general political movement in which the State was supposed to withdraw from economic decision-making. Government believed that decisions made in private, hopefully competitive markets would be more efficient in allocating resources. When public money was provided to the energy system, whether in the

7 G. MacKerron, ‘Innovation in energy: the case of the electricity supply industry,’ in M. Dodgson and R. Rothwell (eds.) Handbook of Industrial Innovation, Edward Elgar 1995, pp. 182–190.

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form of R&D or – more substantially – subsidy for new technologies, it became an article of faith that the public sector should avoid ‘picking winners’. Instead it should develop ‘technology-neutral’ policy approaches such as emissions trading, and where a particular set of technologies was to be funded, notably renewables, the instruments used were to be technology-blind and give equal incentives to all renewable technologies, irrespective of the state of their technical and commercial development. Despite these major changes in public policy towards energy R&D and innovation more widely, there was both R&D and commercial innovation in the private sector. Most notably, the international heavy electrical industry had been developing improved versions of the combined cycle gas turbine (CCGT) in the 1980s, and UK circumstances in the early 1990s were peculiarly favourable to the rapid deployment of this technology. The reasons were: liberalisation favoured low capital cost investment; the privatized gas industry was looking for bulk markets and gas prices were low; and new Regional Electricity Companies (as seen above) were looking for investments that would give them bargaining power against the new duopoly in electricity generation. The 1990s were therefore a period of major innovation in electricity generation, with 20 GW of new CCGT capacity displacing coal-fired generation. A fortuitous outcome of this market-led change was that the UK substantially reduced its carbon emissions in the decade after 1990, so that when the Kyoto Protocol was developed in 1997, the UK had already effectively achieved its apparently stringent 12.5% emission reduction commitment for 2008–12 compared to 1990.

5 UK Energy Policy and Its Influence The result of all these developments was that by the turn of the century the Kyoto commitments had very little impact on energy policy. In terms of the issues discussed here – renewables and CHP – the UK had developed a mechanism as early as 1990 to give some incentive to renewable energy (the Non-Fossil Fuel Obligation).8 However this was a subsidiary part of a much more expensive and politically significant policy designed to keep nuclear power commercially afloat, and it had very limited impact on the deployment of renewables on the ground – by 2000, renewables still constituted less than 2% of UK electricity generation. Gasfired CHP meanwhile, in industrial settings and stimulated by the same low gas prices that allowed CCGT development, made significant advances, often replacing older coal-based CHP. However this progress was limited by the rapidly reducing UK industrial energy use as heavy industrial activity contracted, and after 2000 by unfavourable movements in the spread between electricity and gas prices.

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C. Mitchell, ‘Renewable generation – success story?’ in J. Surrey, op. cit. pp. 164–184.

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In the household and commercial sector, CHP had never been significant in the UK, partly due to the absence of any local or regional focus for energy production, later reinforced by the extensions of the gas grid to the great majority of UK households while gas prices were low, allowing individual gas-fired boilers to be a commercially cheap option – and for household consumers to be effectively locked-in to individual gas-fired-boiler-based domestic heating even when gas prices later rose. In 2003 there was a major shift in UK energy policy. A White Paper published in that year abandoned the idea that energy policy was primarily to do with short-run efficiency and competition, and instead put radical and long-term emission reductions ‘at the heart’ of energy policy.9 This White Paper introduced the idea that the UK needed to be on a path to cut carbon emissions by 60% in absolute terms by 2050. The policy statement was at best lukewarm about nuclear power and placed energy efficiency and renewables at the centre of policy commitments. This major shift in energy policy orientation has been somewhat modified since 2003. A major new policy statements in 200710 reflects the idea that energy security now has at least equal billing as an objective with carbon emission reductions. There is also an increased emphasis on large-scale supply options – thus nuclear power is now being encouraged and more resource is being put into CCS. On the other hand, the Climate Change Act of 2008 and the Low Carbon Transition Plan of 2009 endorse the idea that the UK should now aim for an 80% carbon emissions reduction by 2050, and the new Committee on Climate Change is responsible for setting rolling 5-year carbon budgets that are meant to be compatible with achieving the 80% goal. And the UK now has the very demanding commitment, under the EU 2020-20 plan, to a 15% share of renewables in the energy mix by 2020, implying a share in electricity of over 30%. So in principle, both renewables and CHP – but pre-eminently renewables – should continue to be prominent in the policy mix.

6 R&D and Innovation Policy R&D and innovation are from identical categories. Large amounts of R&D – as in the case of fast breeder and fusion in earlier UK history – may have zero impact on innovation.11 Equally, innovation may be stimulated by policies or market circumstances far removed from the R&D, as in the case of rapid CCGT innovation in the 1990s, when particular market and policy circumstances led to deployment of a technology already available (though it had needed prior private sector R&D to be available at all). Once the issue is cast in terms of innovation – the deployment of novel technology in a market setting - rather than simply R&D, it becomes difficult to

9

DTI, op. cit. DTI, Meeting the Energy Challenge – a White Paper on Energy, Cm 7124, May 2007. 11 G. MacKerron (ref 7 above). 10

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demarcate exactly what constitutes ‘innovation policy’. Much of the policy in the UK that might be expected to stimulate renewables innovation has not been in the R&D domain and very often has been completely technology-blind. In the former category there is the Renewables Obligation, which has as its focus the requirement on electricity retailers to reach successively higher proportions of their sales sourced from renewables. In the latter category there is industry-oriented Climate Change Levy and the Europe-wide EU Emissions Trading Scheme, designed to give financial incentives to low carbon sources of energy. The ideological preference in the UK for market-based policies has been strongly to favour ‘universal’ instruments like the EU ETS over winner-picking strategies, under the influence of a style of economic theorizing that assumes that private markets are efficient and likely to respond rapidly to relatively short-term financial incentives.

7 Renewables Policies In the 1970s the UK engaged in limited public funding of some renewable energy technologies, but these efforts were small-scale and favoured technologies that frequently changed. There was no significant renewable generation before 1990, apart from a few pre-existing hydro schemes, mainly in Scotland. As previously outlined, the UK then developed an incentive mechanism from 1990 onwards (the NFFO) which required energy retailers to source a rising proportion of their supplies from renewable sources each year. It was developed in several bidding rounds, and involved substantial competition, so that there was no certainty that given projects would be supported. Once allowed into the scheme, renewable energy suppliers were then given access to a premium price. By 2000, 10 years after the start of the NFFO, the proportion of renewable energy in the overall power mix was still only 1.8%, and in 2002 a new system, the Renewables Obligation (the RO), was set up to replace the NFFO. This was also a competitive system, the centrepiece of which was Renewable Energy Certificates (ROCs) which are tradable, and the price of which varies with market conditions and the degree of success in establishing renewable investments. The obligation to hold sufficient ROCs, which rises year by year, is placed on electricity retailers. If they are short of ROCs in any given year, they are then obliged to pay a ‘buy-out price’ in compensation, and the proceeds of this are then re-distributed to renewables developers in proportion to their production. 12 This system was initially technology-blind in respect of individual renewable technologies, but since 2009

12

C. Mitchell et al. ‘Effectiveness through risk reduction: a comparison of the Renewables Obligation in England and Wales and the feed-in system in Germany,’ Energy Policy 34 (297–305), 2006.

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has been modified in the form of ‘banding’, under which different renewables receive different values of ROCs according to their stage of development. Despite this change, the ROC system contains substantial financial risks for renewables developers compared to the feed-in tariff, largely because the financial returns on investment are impossible to predict with accuracy as they depend on the state of the overall electricity wholesale market and the actions of all other renewables developers13 (investment is more profitable if the whole system fails to meet the specified annual ROC level). Originally the RO required that the proportion of renewables in electricity generation should reach just over 15% by 2015/16 and thereafter remain constant until 2017, now modified to 2027. However, the European 20-20-20 initiative required all EU Member states to raise their proportion of renewable energy substantially by 2020. The UK commitment to 15% of renewable energy in total energy supply correspondingly requires a level of renewable penetration in the power sector of something above 30%. By 2009 the penetration of renewables into the power market had reached 6%, very far short of the new 2020 commitment. The UK commitment to a 15% share of renewables in energy supply by 2020 has led to a flurry of new policy activity, principally a new feed-in tariff for small-scale low carbon generation but also a proposed Renewable Heat Incentive. The UK is retaining its ROC system as the primary method of supporting large-scale renewable energy but in April 2010 it introduced a feed-in tariff for a wide range of low carbon sources below 5 MW, including microgeneration CHP (below 2 kW).14 The tariff, which varies by technology, is payable on all generation (self-consumed and exported) and the financial terms are negotiated with the consumers’ electricity supplier, which has to bear the initial cost but in practice will probably be able to pass on the extra costs to its overall consumer base. The tariffs are generous and much interest has been generated at household and community level, though it is too early to know how successful the policy will be. In addition the government is currently consulting on a new Renewable Heat Incentive which will in principle be introduced in April 2011.

8 CHP Policies In the absence of any serious local or regional locus for energy policy, and with a pervasive natural gas network supplying a high proportion of heat needs, the UK has had no history for the last half century in municipal or other local level CHP or district heating (DH). Industrial self-generation was however of some importance for energy-intensive industry and this revived, using up to date gas technology in

13

C. Mitchell et al. (op. cit.) http://www.decc.gov.uk/en/content/cms/what_we_do/uk_supply/energy_mix/renewable/ feedin_tariff/feedin_tariff.asp.

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the 1990s. Government set a target of 5 GW of CHP for 2000, a figure that was marginally missed, and then felt confident enough to set a 10 GW target for 2010, for ‘good quality’ CHP, involving a minimum level of heat use and other qualifications. Some policy instruments favoured industrial CHP, including exemption from the Climate Change Levy, enhanced capital allowances and full reward for carbon saving under the EU ETS from 2008. However these policies have had marginal effects and faced with unfavourable spreads between gas and electricity prices, investment in CHP has stalled and the 10 GW target has been quietly abandoned. As the chapter in this book by Praetorius et al. demonstrate, microgeneration CHP, despite greater financial incentives, has had very limited development to date. General energy policy in the liberalised UK regime has, overall, had mixed effects on renewable and CHP development in the UK, but it is clear that overall the policy environment has been less conducive to the development of these technologies in the UK than elsewhere in Europe, and in the case of CHP, there has in practice been very little serious policy effort.

9 Regulatory Influences Somewhat separate from overall energy policy developments the UK energy regulatory system has also had some influence on the development of renewables and CHP. Under the energy policy regime from 1990 until the very early years of the new century, and to a considerable extent subsequently, the gas and electricity regulator OFGEM has been the major determinant of the ‘rules of the game’ in both markets. OFGEM has always been home to a relatively pure version of theorizing about the value of competitive markets in achieving economic efficiency, itself seen as the touchstone of good energy policy. Its original terms of reference required it to give prominence to ensuring competition in relevant markets and to policing the pricing of the natural monopoly elements (transportation). The Utilities Act of 2000 gave it new but still secondary duties to consider social and environmental objectives, but in practice this did nothing substantive to assist renewables or CHP. OFGEM presides over the detailed market arrangements for both gas and electricity. In electricity, the original post-privatisation market (the ‘Pool’) was a centralised, but in many ways economically efficient market form. However dissatisfaction with some of its characteristics led OFGEM to review the market form and in the early years of the century a new market form was introduced (originally NETA or new electricity trading arrangements) which was more decentralized and as far as possible mimicked a commodity market, with bilateral trading and no explicit investment incentive. This was, in its original form, a significant disincentive for small generation sources like renewables and CHP, and despite some reforms designed to help small-scale generation, the new arrangements are at best neutral in terms of their impact on renewables and CHP.

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OFGEM has in recent years increasingly recognized the need – as has energy policy more generally – for major reforms to, and investment in, the electricity transmission system if more low carbon technologies are to be successfully implemented. It has also recognized the need for more R&D. In transmission the need is partly to integrate more small-scale distributed generation but also some remote but large-scale sources. If the UK is to come even close to its 2020 renewables commitment it will need very large offshore wind clusters with correspondingly large new transmission systems. OFGEM has in consequence developed small-scale but potentially important regulatory initiatives to help with R&D and to connect distributed generation. It has done this for R&D via an Innovation Funding Incentive, allowing distribution companies to pass through 80% of specified but limited R&D spending, and for connection of distributed generation a scheme known as Registered Power Zones, a direct financial incentive for such connections.15 However these initiatives are very small-scale compared to the scale of the task of connecting large quantities of often remotely sited renewables, and OFGEM is working directly with Government to find ways of expanding the grid system for this purpose.

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Conclusion

The main influences on the limited development of renewables and CHP in the UK have been the centralised character of policy-making and investment, with no serious regional or local initiatives and, following a strong version of liberalisation, an aversion to ‘picking winners’ technologically. This has made efforts to develop small-scale technologies like CHP and (most) renewables difficult in a UK context. The regulatory system (primarily OFGEM) has been required to follow a stringent focus on economic efficiency and has been unable to give significant assistance to renewable or CHP development though there are growing efforts in recent years especially in response to the EU 20-20-20 initiative. CHP has never been a genuine priority for policy-making, and attention has been focused almost wholly on industrial CHP, given the major obstacles in developing local CHP. Renewable development has been more seriously pursued by policy but development has been hampered by adherence for most of the last 20 years to a model that insisted on making competition an organizing principle of support mechanisms – substantially raising investor risk – and also on aiming to be technology-blind, thus retarding the development of all renewable options except wind power. There are now signs that Government is taking a more strategic view, given the very demanding commitments to renewable energy by 2020.

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R. Sauter and D. Bauknect, ‘Distributed Generation: transforming the electricity network,’ in I. Scrase and G. MacKerron (eds.) Energy for the future, Palgrave, 2009, pp. 147–164.

The Context of Innovation: How Established Actors Affect the Prospects of Bio-SNG Technology in Switzerland Steffen Wirth and Jochen Markard

1 Introduction The implementation of new technological fields is a complex, multi-faceted process. At the outset, it is highly uncertain whether a new technology will succeed, how and where it will be applied, which kind of actors will become involved or how business models will look like. These issues, among others, depend on how an emerging technological field becomes connected with organizations as well as institutional structures in established sectors. Technology development will be shaped by institutional structures that prevail in the corresponding sector. Furthermore, actors from this sector are likely to play a particular role in the innovation process. The development path of a novel technology, in other words, may strongly depend on how the technology links up (or not) with existing sectors. In the study of emerging technological fields, a systematic analysis of context structures should therefore be a crucial element. With this article, we will illustrate how such a context analysis can look like and we will empirically demonstrate how developments in adjacent fields can influence an emerging technology. For this kind of analysis, a conceptual basis is needed that accounts for the complexity and nonlinear nature of the underlying processes and the possibly large variety of different context developments. Innovation system approaches, and the technological innovation systems (TIS) perspective in particular, have lately received increasing attention for the study of emerging technologies (e.g. Bergek and Jacobsson 2003; Bergek et al. 2008b; Carlsson et al. 2002; Negro et al. 2008; Jacobsson 2008). With this paper, we want to address the question how structures and developments in the broader context affect an emerging technology. Our focus will be on traditional roles of actors from established sectors and their characteristics and interests. For the empirical case at hand it will be shown that decisions of incumbent actors in favor of competing technologies can have a decisive impact. S. Wirth (*) • J. Markard € CIRUS, EAWAG, Uberlandstrasse 133, 8600, D€ ubendorf, Switzerland D. Jansen et al. (eds.), Sustainability Innovations in the Electricity Sector, Sustainability and Innovation, DOI 10.1007/978-3-7908-2730-9_9, # Springer-Verlag Berlin Heidelberg 2012

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The empirical case we present is Bio-SNG technology and our analytical focus will be on Switzerland, which is where central scientific basics have been developed. Bio-SNG technology is based on a multi-stage process in order to produce synthetic natural gas (SNG), electricity and heat from wood by means of gasification and catalytic methanation. Bio-SNG is highly suitable for an analysis of context dynamics because it relies on established sectors for wood input (forestry, sawmill industry) and energy output (electricity, gas supply). Our contribution is based on a recently finalized study conducted within the Swiss Competence Center for Energy and Mobility of the ETH domain (cf. Wirth 2009). In this contribution, it will be argued that technologies with potential linkages to different existing sectors are confronted with the particularities and traditional structures of each of these sectors including the interests and resources of very different actors. In the case of Bio-SNG, different configurations of actors and business models for the operation of different types of plants are thus conceivable. Which of these will be realized depends on general developments in the underlying sectors but also on the particular actors, strategies and local circumstances in each case. However, some general insight into the conditions for technology development can be identified based on the context analysis. The text is structured as follows. Section 2 introduces the conceptual background of technological innovation systems and their context. Section 3 presents the Bio-SNG technology and key actors and developments in the different context structures that possibly affect the emerging technology. In Sect. 4, organizational development options of Bio-SNG will be analyzed taking into account the context conditions identified before. Section 5 elaborates on the general lessons and concludes.

2 Technological Innovation Systems Framework and Methodological Background Technology development is the result of a large variety of coupled processes in different fields of economic activity. Various kinds of actors and institutional structures are involved in these processes and through their interaction they shape the characteristics of the emerging technological field. At the same time, developments in the broader context, e.g. in adjacent sectors, have an impact on the novel technological field. The complex nature of these processes and interactions can be conceptualized with innovation system approaches (e.g. Carlsson et al. 2002 or Chang and Chen 2004). Such system-based frameworks account for non-linear dynamics, cumulative effect, emergent institutional and organizational structures and path-dependencies, for example (Aghion et al. 2009). For the following analysis, we will use the technological innovation system (TIS) framework (cf. Bergek et al. 2008a; Markard and Truffer 2008b). A technological innovation system can be defined as

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a set of networks of actors and institutions that jointly interact in a specific technological field and contribute to the generation, diffusion and utilization of variants of a new technology and/or a new product (Markard and Truffer 2008b, 611).

Actors are individuals but also – and most importantly – organizations such as private firms or firm sub-units, governmental and non-governmental agencies, universities, research institutes, associations etc. Institutions are defined as rules (or sets of rules) that influence the activities and decisions of the actors. They set incentives for actors to do certain things and to avoid others. Institutions include norms, laws, regulations, guidelines, contracts, values, culture, cognitive frames etc. Institutions can be interpreted as the rules of the game, while actors, or organizations, are the players (e.g. Edquist 2005; North 1990). Organizations are regarded as the source of agency as they formulate aims and pursue deliberate strategies that are influenced but not fully determined by institutions. Institutions in contrast are interpreted as more passive elements. Unlike organizations, they cannot deliberately transform themselves but evolve and change as a result of the effects of other institutions and of the activities of organizations. In recent years, the technological systems or TIS perspective has received quite some attention (e.g. Bergek and Jacobsson 2003; Carlsson et al. 2002; Markard and Truffer 2008a; Negro et al. 2008; Jacobsson 2008). The general interest of much of the work in this field is to identify regularities in the emergence of new technologies and to clarify the conditions under which they develop quickly and become a success or fail (e.g. Bergek et al. 2008a; Hekkert et al. 2007; Jacobsson 2008; Suurs and Hekkert 2009). In comparative research designs, for example, the development of a selected technology and the corresponding TIS is studied across different countries to identify the factors that led to similar or different outcomes (Bergek and Jacobsson 2003; Jacobsson and Johnson 2000; Negro and Hekkert 2008). A conceptual strength of the TIS approach is the idea to analyze emerging systems in terms of key processes or functions that are essential for triggering off self-reinforcing dynamics that contribute to system growth and maturation of the underlying technology (e.g. Bergek et al. 2008b; Chaminade and Edquist 2005; Hekkert et al. 2007; Suurs and Hekkert 2009). While quite some progress has been achieved with the aforementioned studies, a more systematic analysis of the context and how a technological innovation system links up with context structures, for example, has not been much of an issue. Most of the TIS literature even lacks an explicit conceptualization of the system context and context dynamics, which is why conceptual borrowings from the multi-level perspective were proposed to develop a more elaborate understanding of potential structures and dynamics in the TIS context (Markard and Truffer 2008b). Figure 1 schematically depicts how the interaction of a focal technological innovation system with existing sectors (or socio-technical regimes) and other emerging technologies could look like. Actors of an established sector can, for example, commit themselves to the new technology, which means that a link between the TIS and the existing business field emerges. The relationship between a TIS and an

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Complementary innovation

Competing innovation

Technological innovation system

Sector2 Sector1

Fig. 1 The context of a technological innovation system

established sector can also be competitive if the innovation challenges existing technologies and the underlying regime structures of the sector. Take for example, the electricity sector and the role of renewable energy innovations vs. established fossil fuel- or nuclear-based power generation technology. We make use of the notion ‘sector’ in the sense of socio-technical regimes conceptualized in terms of rules like in the original definition by Rip and Kemp (1998) and later empirically used in a broader sense by Geels (2002). Rip and Kemp (1998) defined a technological regime merely as “. . .the grammar of rule set comprised in the complex of scientific knowledge, engineering practices, production process technologies, product characteristics, skills and procedures, and institutions and infrastructures that make up the totality of a technology. . .” (Kemp et al. 2001, 272). In the empirical part of his article, Geels (2002, 1263) also included, besides rules or institutions, technology in itself and actors. Also other scholars in the field have advanced the notion of regimes in a socio-technical sense and conceptually integrated actor groups (e.g. Konrad et al. 2006; Verbong and Geels 2007). To summarize, the core idea of our extended TIS framework is to pay more attention to the relative, context dependent nature of technology development. Although this does not change the TIS perspective’s primary focus on a specific technology, it allows taking into account dynamics in related technological fields more explicitly. The context analysis can highlight how organizations, institutional structures and developments in established sectors and in other technological fields affect the emerging technology. There are already some studies connected to

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concepts argued in the previous paragraphs with an empirical focus on biogas (e.g. Markard et al. 2009; Negro et al. 2007; Raven and Geels 2010; Raven and Gregersen 2007). Finally, it also has to be noted that the suggested technological dimension is just one way to differentiate context structures. In a similar vein, context elements could be distinguished along different spatial scales (local, regional, national), for example. In the contribution at hand, we concentrate on the role of actors of established sectors for the novel technology. We follow the assumption that in the case of bioenergy technologies a local respectively regional anchoring of actors is needed due to the geographical character of biomass sources. On the energy output side, utility sectors play an important role. Here, we differentiate between utilities with a clear local activity focus and actors with a more regional or supra-regional orientation. So, the underlying hypothesis of this article is that, concerning the implementation of a technology in the field of biomass-based energy generation, the interplay of actors with a more local and actors with a rather regional or actually supra-regional orientation is normally essential. The empirical case we present in the following is based on a recent report (Wirth 2009) developed in the context of a project on Bio-SNG, which again was part of the Competence Center for Energy and Mobility of the Swiss ETH domain. Our insights are based on an extensive analysis of documents, reports and corporate communications in the field and on 12 interviews with experts on Bio-SNG, forest and timber industry, gas supply and electricity supply. Preliminary findings were discussed with some of the aforementioned experts and also in several internal workshops.

3 The Context of Bio-SNG Technology Bio-SNG is a specific technology in the field of bioenergy. Bioenergy technologies transform different sorts of organic matter (feedstock) into some form of usable energy and a residual material. The technological variety in the field of bioenergy is considerably high because there is a broad range of different input substrates (e.g. manure, organic waste, energy crops, wood) that can be used to generate different energy outputs (heat and/or secondary energy carriers such as electricity, gas or liquid fuels) for different applications (e.g. heat supply of buildings, grid-connected electricity supply, fuel supply). In the wood-to-energy field, 1st generation technologies based on wood combustion (e.g. automatic firing on the basis of wood chips) compete with 2nd generation technologies such as Bio-SNG. The strength of 1st generation technologies is technological robustness, which means that investors face much lower risks. The strength of 2nd generation technologies is the generation of highly valuable secondary energy carriers (e.g. methane gas) at high levels of overall energy efficiency. An innovation analysis of bioenergy production needs to take into account the sectors in which the biomass is traditionally generated, treated, used and disposed

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as contexts that may have a decisive influence on technology development. Outputrelated sectors such as electricity supply, gas and fuel supply are likely to play a role as well.

3.1

Characteristics of Bio-SNG Technology

Bio-SNG is a very recent and not yet widespread technology that uses wood to produce methane gas, so-called synthetic natural gas (SNG). Bio-SNG technology is based on a multi-stage process including wood gasification, catalytic transformation of wood gas into methane and CO2 and subsequent separation of CO2 (cf. Stucki 2005). The novelty of this technology is a catalytic methanation process developed by the Swiss Paul Scherrer Institute. SNG, the resulting secondary energy carrier, can be fed into the existing natural gas network thus substituting fossil methane. The range of final applications includes the use of Bio-SNG as a fuel for gas vehicles or for electricity and heat production in co-generation plants. Compared to other biofuels, Bio-SNG is expected to be cheaper and it also has a promising ecological performance (cf. M€ uller-Langer and Oehmichen 2009; Steubing et al. 2011). Another advantage of Bio-SNG technology is that excess heat, for which there is often only little local demand, is lower than in the case of other wood combustion technologies, for example. A possible proportion of the energetic output of a Bio-SNG plant is roughly 58% Bio-SNG, 29% heat and 13% electricity (cf. Wirth 2009, 13), while conventional wood combustion plants achieve about 35% electricity output and 65% heat. As a matter of fact, Bio-SNG plants can be located more flexibly as they can still be operated efficiently at places where local heat demand is low. This opens up opportunities for plant upscaling. It is expected that commercial Bio-SNG plants will require a size of 20 MW and above. Plant size also points to a disadvantage of the novel technology: The processes for wood gasification, catalytic methanation and CO2 separation are complex and expensive, which is why large plants will be a necessity. This also leads to organizational challenges with regard to the supply of input substrates. To feed Bio-SNG plants, various wood assortments are suitable although dry wood in the form of chips is advantageous. For the basic setting of a plant it is relevant that feedstock with similar quality is available over time. Moreover, the wood should not be contaminated with chemicals which might be the case for waste wood. Against this background, energy wood from forests, residual wood from the wood industry (especially from sawmills) and possibly corridor wood are the most appropriate substrates for Bio-SNG plants – in Switzerland and elsewhere.1 What comes along with the use of wood as the primary energy carrier is that transport distances are usually limited (about 50–100 km) for economic and ecological reasons. This means

1

In other more large-area countries, plantation wood may also be of importance.

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Table 1 Bio-SNG projects in Switzerland: plant dimensions and actors Output in MW Name

Heat

Financing and Power SNG operation

Baden (CH) Performance of gasifier: 8 MW

~1.6

~0.7

Ecle´pens (CH) Performance of gasifier: 20 MW

~4.0a ~1.8a

~3.2

Regional utility, regional gas company and supra-regional utility

Business model

Wood supply

Energy take-up

Logistic company specialized on wood

Municipal Utilities and utility, cantonal gas hospital and supplier regional gas utility

~8.1a To be defined The project in Ecle´pens has been initiated by Gazobois AG which is a consortium of a local gas supplier, a subsidiary of a cantonal utility specialized in renewables and regional energy utility

a

Own estimation

that Bio-SNG plants have to be built close to large forests or at places where wood is already processed or used (e.g. large sawmills). Bio-SNG is still in a pre-implementation phase. In 2009 just one pilot plant of 1 MW existed in G€ ussing, Austria. In Switzerland, there are two plants in an early stage of planning (cf. Table 1; Wirth 2009). And in Sweden, Gothenburg Energy in collaboration with E.ON wants to build a 100 MW Bio-SNG plant (cf. Wirth 2009). Due to this early state of development, organizational and institutional structures in support of Bio-SNG are still weak and the technology is primarily driven by research. In other words, Bio-SNG can be regarded as an emerging technological field that has not yet developed the clear institutional contours and the broader range of technology developers and users we would expect in more mature technological innovation systems.

3.2

Actors and Main Developments in the Context

Bio-SNG technology can be expected to receive its primary inputs from forestry and the sawmill industry although other wood processing firms may play a role as well. Energy outputs will be relevant for the gas and the electricity sector. Competitive interactions exist with the field of wood combustion (energetic use of wood) and with timber products and the pulp and paper industry (material use of wood). The technological fields and sectors in the context of Bio-SNG are depicted in Fig. 2. In the following, we discuss relevant characteristics and developments in these sectors. Each subsection briefly addresses major actors as well as recent developments and institutional influences which possibly affect the emerging field of Bio-SNG. The idea of this section is to identify actors of the different sectors which may possibly get involved with the new technology and major institutional influences on Bio-SNG development. Our empirical focus is on the situation in Switzerland although some findings may also apply elsewhere.

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Gas Sector

Bio-SNG

Electricity Sector

Forestry

Log Combustion Waste Incineration

CHP

Wood Chips Combustion Pellets Combustion

Waste Sector

Sawmill Industry

Wood Combustion

Timber Product-, Pulp-and Paper Industry

Fig. 2 The context of the technological field ‘Bio-SNG’

3.2.1

Forestry and Sawing Industry

In Switzerland, 71% of forest area is owned by public authorities, e.g. cantons or municipalities (cf. BAFU 2009). From our study we take that especially large public forest owners (forestry) control sufficient wood quantities and may have the interest to invest in wood-based energy plants in order to foster local-regional value creation. In timber industry, large sawmill owners also turn out as possibly important actors for the new Bio-SNG technology. Some have already invested in conventional wood-fired co-generation plants. Sales of sawdust and wood residues provide an important stream of income for these actors and sawmills also have a substantial demand for power and heat, e.g. for drying sawn wood. Moreover, local storage for wood residues is typically limited, which also favors the energetic use of wood on site. Table 2 resumes key characteristics and interests of these two groups of actors. The wood market has been typically characterized by stable relations between seller and purchaser up until now. The primary reasons for such continuities are wellattuned and long-time co-operations. Especially in regionally and locally oriented transactions, aspects like trust, personal relations or habits can form the markets of raw wood. With respect to wood from forest for energetic utilization, this energy wood originates in connection with interference in the forest (e.g. silvicultural measures

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Table 2 Relevant actors from forestry and sawmill industry with their prerequisites for possible Bio-SNG involvement Actor group Prerequisites for a relevant role in Bio-SNG Large public forest owners – Possess relevant quantities of forest energy wood; however forest energy wood is the costliest feedstock – Interested in local/regional economic development and value creation – No primary interest in SNG, but possibly interested in ecologically worthwhile and efficient usage of wood Large sawmill/industrial sawmill owners

– Produce substantial amount of sawmill residual wood (wood chips, saw dust etc.) – Sales revenue from wood residues are very important for the business – Need of heat for timber drying; possible interest in heat and power generation – Limited storage capacities for sawdust

like thinning or harvest). An implication of silvicultural measures is the accumulation of qualitatively low-value wood. This inferior wood is not adequate for the sawing industry but for the timber product industry and/or for an energetic utilization. A large part of silvicultural measurements are triggered through the demand for trunk wood from the sawmill industry. And in this industry, there has been a structural change going on in the last years which could be described with the following aspects – with a special focus on Switzerland: – industrialization of sawmill industry in central Europe leads to new technologies for processing wood (weak dimensions are in demand by trend), – amount of sawmills decreases (concentration),2 – increase of total volume of sawing, – competition for the resource ‘wood’ due to the extension of sawing capacities. Between 2002 and 2010 a doubling of sawing stem wood could be reached, and – in terms of sites of new sawmills, it is aspired to use the residuals from wood processing directly on-site. All these changes and the extension plans concerning the capacities for sawing wood generate new amounts of sawmill by-products (residual wood from sawmill industry) and represent interesting chances for Bio-SNG. Furthermore, there is an ongoing discussion about setting up a saw mill specialized on sawing hardwood. Here, another window of opportunity for the construction of a Bio-SNG plant may open up.

2 In 2009, the six largest sawmills are supposed to cover 58% of the sawing capacities in Switzerland (cf. HIS 2006, 2007).

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Gas Sector

Gas suppliers will play a role in the emerging field as they take-up SNG and sell it to their customers. In general, the gas industry in Switzerland welcomes the feed-in of biogas as it contributes to the positive image of natural gas. In a frame contract, the Swiss gas industry and producers of biogas on the basis of digestion have expressed their will that 10% of the natural gas shall be produced from renewable energy sources (cf. Kreber 2006; Markard et al. 2008). The price indication for a take-up is at 7.5 Rp per kilowatt hour (equivalent to about 5 €ct). If this goal were to be reached just by methane from Bio-SNG plants, a capacity of 300–400 MW (more than 10 large plants) would be needed (cf. Vogel and J€onsson 2009). And, a feed-in tariff that covers the costs for the production, distribution etc. requires a minimum amount of approximately 12 Rp (about 8 €ct). Despite these ambitions there is also some reluctance towards biogas in the gas industry. Marketing of biogas as a separate product like in the case of green electricity is seen critical by many players as this requires a differentiation between natural gas and biogas in ecological terms. It is feared that the rather green image of natural gas might be affected negatively. However, some gas suppliers already offer biogas as a separate, green product on the basis of certificates. The Swiss gas supply sector includes organizations at different hierarchical levels. Four regional gas companies import the gas and sell it to local gas utilities, which are at the same time shareholders of the regional gas suppliers.3 Hence, activities and investment decisions within the Swiss gas industry are strongly based on locally anchored constellations of interests due to the bottom-up decision processes: i.e., that a couple of local gas utilities decide about basic activities of the correspondent regional gas company (e.g. 12 local gas utilities are the shareholders of the regional gas company of the Eastern Switzerland). The business of the regional gas suppliers is to trade and distribute gas. Their competence in pursuing business fraught with risk, beyond trade and distribution, is quasi nonexistent. Therefore, it is currently very unlikely that a regional gas supplier initiates innovative projects or invests into gas generation plants. Insofar, rather one of the large local gas utilities (e.g. in Zurich, Basel or Geneva) can be in the run in favor of Bio-SNG (Table 3).

3.2.3

Electricity Sector

Electric utility companies may also play a role for Bio-SNG as they take up and sell the electricity produced in Bio-SNG plants. Moreover, many utilities have

3

In Switzerland, there are about 100 local gas utilities. The four regional gas companies are: Gaznat (Western Switzerland), Gasverbund Mittelland GVM (Northwest of Switzerland), Erdgas Ostschweiz EGO (Eastern Switzerland) and Ergas Zentralschweiz EGZ (Central Switzerland).

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Table 3 Relevant actors from the gas sector with their prerequisites for possible Bio-SNG involvement Actor group Prerequisites for a relevant role in Bio-SNG Large local gas – Production of SNG could be strategically interesting (negotiated agreement suppliers of gas industry, new business segment) – Good capital base – Possibly lack of technical know-how concerning the production of energy

technological, organizational and financial competences in power plant operation, which can be applied to the new field. In the Swiss electricity market, three major groups of utility companies can be distinguished: municipal utilities, cantonal utilities and large regional and supraregional suppliers (cf. Meister 2007, 19; Meister 2009, 78). Most of these firms are fully or partially owned by public shareholders. A major difference apart from firm size and sales volume is that municipal utilities and often also cantonal utilities do not hold substantial power generation capacities. Instead, they primarily buy electricity from e.g. supra-regional suppliers and concentrate on distribution and sales. Large power suppliers, in contrast, own and operate power generation facilities of all kinds, including not only hydropower and nuclear power but also gas and coal fired power plants (mostly abroad). As a consequence, these firms have substantial experiences with power generation and also the financial capital to invest in BioSNG plants, for example. From a regulatory perspective, the electricity sector in Switzerland is most notably confronted with the stepwise market opening (liberalization), expiring supply contracts for nuclear power from abroad as well as the reach of age limit of domestic nuclear power plants. All these aspects have triggered a vivid discussion about the future direction of power generation and how to replace existing nuclear based capacities. Security of supply is a central aspect in the debate. Moreover, the necessity of environmental and climate protection becomes more and more prominent and there is substantial opposition to building new nuclear power plants. In Switzerland, besides photovoltaics and small-scale hydropower, the energetic use of biomass has a high potential among the renewable energy carriers (cf. EnergieTrialog-Schweiz 2009, 59). And, there is partly a political pressure on municipal and cantonal utilities to increase their commitment to renewables (Table 4). Furthermore, the following influences complement the picture of context conditions for Bio-SNG in Switzerland: – Cost-covering feed-in tariff: By introducing the cost-covering feed-in tariff for power with January 1st, 2009, an essential blocking mechanism for biogas fell and a boom in biogas (1st generation) like in other European countries could be expected. Generally, with the declining tariff the operation of small plants is rather interesting because it is more complicated to organize the take-up of heat at the site of larger plants. For example, the (basic) tariff for plants dimensioned above 5 MW is only 15 Rp (about 10 €ct) per kWh and is so lower than in Germany or Austria.

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Table 4 Relevant actors from the electricity sector with their prerequisites for possible Bio-SNG involvement Actor group Characteristics and interests Municipal and cantonal – Core business: distribution of electricity and retail, partly also utilities generation – Often influenced by local and regional interests – Use of local resources like biomass, appropriate locations etc. – Typically offer green electricity products for end consumers – Mostly good capital base Supra-regional utilities – Core business: generation, transmission and trade of electricity – Strong profit orientation; international orientation – Need to expand/renew power generation capacities – Acquisition of competences in the field of renewable energies – Technical know-how concerning the production of energy in general (engineering, technological and process related competences) – Very good capital base

– Cap of budget for granting feed-in tariffs: The budget for financing the costcovering feed-in tariff was already absorbed by the end of January 2009. Until this regulation will be redefined, all new applications for energy and power plants on the basis of renewable energy sources are set on a waiting list. Here, thwarting the dynamic and large insecurity concerning future investments are a problem.

3.3

3.3.1

Competing with Bio-SNG for Wood: Wood Combustion and Timber-Based Industry Wood Combustion

A conventional way to use energy wood in Switzerland is combustion for the purpose of space heating. Thousands of households use log wood as a primary or auxiliary source of heat supply. More recently, automatic heating systems on the basis of wood pellets (from sawmill dust) and wood chips have gained increasing attention. Automatic heating systems and the availability of wood pellets and chips have benefited from the general trend to use renewable instead of fossil energy carriers. In Switzerland, most of the cantons support the installation of wood firing plants with financial contributions as well as tax reductions. At a larger scale, also wood based co-generation plants compete with Bio-SNG technology. Compared to catalytic methanation, wood combustion is technologically much less complex, very reliable and also more tolerant with regard to shifting qualities of wood supply. To a certain degree, combustion technology therefore also tolerates the use of waste wood. Wood combustion plants become economically viable above a size of 2–3 MW. The major challenge of this technology is that a

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local, year-round heat demand is necessary. In Switzerland, six large co-generation plants are under operation (cf. BFE 2009, 64) and another three are planned. Table 5 depicts some basic characteristics of these three co-generation plants in Switzerland as these are – in terms of size, wood supply and organizational structures – comparable to future Bio-SNG plants (cf. Wirth 2009).

3.3.2

Timber-Based Industry

The Swiss timber product (boards), pulp and paper industry has substantially changed. In the last three decades, the number of wood panel producers have declined from 20–30 to only two. The pulp and paper industry saw a similar reduction with again two firms left and the only cellulose producer in Switzerland just ceased production. The remaining companies of the Swiss timber product and paper industry potentially compete with the Bio-SNG technology because of the interest in the same feedstock. In general, the design of production processes in the timber-based industry can influence the availability of accordant assortments. The wood amounts these companies demand for is composed of two third sawmill residuals and one third wood from the forest for industrial processing. In principle, sawmill residual is rare in Switzerland (based on the situation in 2007; cf. also BAFU 2009; Baum and Baier 2008). That is why lots of sawmill residuals are imported. With respect to the timber-based industry, another aspect in the sense of opportunity for Bio-SNG is to address: With the closing of Borregaard in 2008, the only producer of pulp in Switzerland, substantial amounts of industry wood fell free. This opens new supply opportunities for other recipients of industry wood and wood-to-energy projects.

3.4

Synthesis: Bio-SNG Technology and Its Context

The analysis of the emerging Bio-SNG innovation system and its context has revealed that the novel technology is influenced by a range of different sectors and technological developments. The overall picture that emerges from this analysis is that the prospects for Bio-SNG plants in Switzerland are vague (see Fig. 3). There is a current boom in conventional wood-to-energy technologies that – together with an expansion of sawing capacity – has made wood an increasingly scarce resource. In the coming years, the opportunities for novel wood-to-energy plants will therefore decrease rapidly. As a consequence, there will be little room for novel technologies such as Bio-SNG to mature. Instead, conventional 1st generation technology plants have been and will continue to be built. The situation is aggravated by the fact that large scale wood-to-energy plants are typically backed up with long-term (e.g. 10 years) wood supply contracts and have an economic lifetime of 20 years and above.

11

–

Cantonal utility

Corporatized logistic company specialized on wood

Corporatized logistic company specialized on wood (newly founded by reasons of supplying this plant; municipal utility and sawmills are shareholders)

Cantonal utility and municipal utility

Municipal utility

28

Municipal utility

Wood-fired power station Aubrugg

–

18

Wood-fired power station Bern

7

Heat Power SNG Financing and operation Wood supply Energy take-up Municipal utility 21 4 – Holzkraftwerk Basel AG 50%: Large sawmills, – 34% municipal utility municipalities/cantons, waste wood supplier – 15% regional utility 50%: corporatized logistic company specialized on wood – 51% corporatized logistic company specialized on wood

Example Wood-fired power station Basel

Table 5 Examples of cogeneration plants based on wood (focused on heat production) Performance in MW

Cantonal utility

Municipal utility

Business model Combination of biomass producer and municipal utility

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Expansion wood-to-energy

Some increase in supply

165

Excess demand regarding energy wood Bio-SNG 15-20 years later Use conventional combustion technology

Increasing demand

Expansion sawing capacities

Wood market changes: • softer range of wood assortments • shorter contract periods • intermediaries

Chance for Bio-SNG to jump in

Expansion or opening of a sawmill Large wood processor stops production

Niches / window of opportunity for Bio-SNG

Fig. 3 Important relations for the realization of Bio-SNG plants

The analysis has also revealed that the aforementioned boom was fuelled by energy policy, especially the feed-in tariff for electricity from renewable energy sources. The feed-in law, moreover, sets incentives for power generation, which is again of little help for Bio-SNG plants that are designed for an optimized gas/fuel output. Despite this general trend, there might be specific, typically local opportunities for Bio-SNG plants. The expansion or opening of a sawmill or the closing down of a large plant in the timber or pulp and paper industry, for example, might represent windows of opportunity for Bio-SNG projects – also in the years to come. In the following section, we will therefore have a closer look at how the context structures affect such potential Bio-SNG projects. Our interest lies in the organizational implications, which then relates to the question which of the different actors in the various sectors are likely to play a role for Bio-SNG. In Table 6 we have summarized key influencing factors which we have found to have a decisive impact on Bio-SNG or wood-to-energy technologies in general.

4 The Potential Formation of Swiss Bio-SNG Innovation System The goal of this section is to integrate the findings on actors, institutional structures and trends in the broader context of the innovation system in order to identify promising configurations for the novel technology. This concentrates on the identification of organizational models for conceivable plant types. We analyze how different actors may work together. Bio-SNG plants can be characterized by a variety of socio-technical parameters. We can define, for example, different types and origins of wood (forest wood, corridor wood, sawmill residues) and small vs. large plants (8 MW and 20 MW). From the analysis in the previous section we take that non-technical factors such as the availability of wood (influenced by logistics, disposability, continuous supply) are important and that the wood supply for large (two-digit MW) Bio-SNG plants is limited in Switzerland. A reliable wood supply will therefore be based on a diversified and balanced choice of different energy wood assortments. This mix will strongly depend on specific local and regional conditions, but in general, forest

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Table 6 Collection of institutional influences from the TIS context and policy as well as relevant actors concerning on Bio-SNG Impact on Bio-SNG/wood-toContext field Influencing factor energy Forestry Wood increasingly scarce resource General limits to the growth of the wood-to-energy market Sawmill industry

Expansion of sawing capacity

General opportunity for woodto-energy plants

Gas sector

Need to increase the share of methane gas on the basis of renewable energy sources

General incentive to take up upgraded biogas respectively to invest into renewable energy plants that primarily generate Bio-SNG

Electricity sector

Need to expand/replace power generation capacities

General incentive to invest in new power plants

Market liberalization

General incentive for electric utilities to diversify into renewable energy technologies

Green electricity marketing

Competing technologies

Feed-in tariff

Strong incentive to invest into renewable energy plants that primarily generate electricity

Cap of feed-in tariff budget

Temporary instead of sustained market growth

Combustion and conventional co-generation technologically mature and more tolerant to shifting wood qualities

Conventional technologies are favored over Bio-SNG

Boom in conventional wood-to-energy technologies

Wood resources are increasingly bound to conventional wood-to-energy plants in long-term contracts

Firm concentration/closure in the pulp and paper industry

Occasional opportunities for wood-to-energy plants

wood and sawmill residues can be expected to play a major role, which is why we now concentrate on large public forest owners and sawmill owners as key suppliers of input substrates.4 In addition, municipal utilities, supra-regional utilities and large local gas suppliers are considered. Table 7 depicts how the three most promising technological options fit with different actors playing a crucial role in operating and supplying such a plant. Note

4 It has to be noted though that the competence of logistic partners (bundling of wood) may also be needed.

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Table 7 Potential combinations of Bio-SNG plant types and organizational models Plant types/organizational Large Large sawmill Municipal/ Supra-regional Large local models public owner cantonal utility gas supplier forest utility owner 8 MW, forest wood ++ 0 ++ 0 + 8 MW, sawmill residue 0 ++ ++ 0 + >20 MW, diversified + + + ++ ++ assortments 0 no fit,+ some fit,++ high fit

that for the smaller dimension of around 8 MW wood supply from a single type seems to be feasible while for plants of 20 MW and above diversified assortments, i.e. a mix of wood and sawmill residues, will be most likely. The analysis shows that in the case of the smaller plants either a forest owner, a sawmill operator or a municipal utility can develop the necessary competences to play a key role in financing and operating such a plant. Of course, cooperation of these actor groups is also possible. Supra-regional utilities and gas utilities, in contrast, have been reported to be less likely to commit themselves as key players because 8 MW plants are small and therefore of rather little interest to them. This holds in particular for large supra-regional utilities. The picture looks different though for plants of 20 MW and beyond. Here, it is less likely that a single feedstock supplier or a municipal utility will become the key player in an organizational model. These actors are usually not large enough to play the dominant, integrating role in a concert of firms that need to be brought together. Moreover, financing will become a major bottleneck. However, both supra-regional utilities and large gas suppliers could step in and take the lead in such projects. Again it has to be highlighted that in any case cooperation among the various actors will be necessary. Our analysis is more to differentiate core actors from more peripheral players. In the last step of the analysis we come back to the context factors and the influence they might have on the role different actors might play for future BioSNG plants. The focus will be on a large plant (>20 MW). The assessment shows (Table 8) that the frame conditions or developments in the context affect the potential actors in different ways. Scarcity of wood, increasing environmental awareness and local-regional commitment of public forest owners were reported to drive their likelihood to participate in wood-to-energy projects (cf. second row ‘Forestry’). And from the perspective of a potential Bio-SNG plant operator, there are strong incentives to organizationally integrate such a player for the exact same reasons. At the same time it will be rather difficult as a newcomer to circumvent the traditional channels of wood supply or to interact on an arm’s length basis. In a similar vein, there are strong incentives to closely cooperate with a sawmill operator – especially if the Bio-SNG is to be placed close to a sawmill (cf. ‘Sawmill industry’). The complexity of the various tasks is quite high and there are many uncertainties, which require close interaction and case-to-case coordination.

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Table 8 Illustrative collection of organizational configurations for a Bio-SNG plant (>20 MW) Context field Influencing factor Impact on organizational structure Forestry Most forest areas under public Large public forest owners will play ownership key role in the supply with forest wood Wood increasingly scarce resource Strong incentive to organizationally integrate large public forest owners Rising environmental awareness, into business model local/regional commitment Contract duration declining Business relationship strongly based General difficulty for newcomers to get on trust and personal relations access to large amounts of wood Sawmill industry Continuous, all-season supply of homogeneous quality Limited storage capacity for residues in sawmills and need for additional revenue Continuous heat demand of sawmills

Strong incentive to closely cooperate with sawmill owners (in technical and organizational terms) if Bio-SNG plant is built close to sawmill

Gas sector

General incentive for large local gas suppliers to become involved

Admixing of SNG has a positive image SNG has some strategic value (10% goal) Specific ownership and organizational structures

Makes it difficult for regional gas suppliers to play a role in Bio-SNG

Electricity sector Market liberalization General incentive for electricity utilities to diversify into renewable Green electricity marketing Increasing political pressure to invest energy technologies in renewable energies Competing technologies

Boom in conventional woodto-energy technologies and strong role of electric utilities in this development

Might also strengthen the role of electricity utilities in Bio-SNG (due to transferable competences) Might as well lead large local gas suppliers to discover Bio-SNG as their ‘terrain’

As another example, the positive image of Bio-SNG as well as the gas sectors target of a 10% goal for renewable methane set incentives for large local gas suppliers to commit themselves to the new field. At the same time, the sector’s organizational particularities make it very difficult for regional gas suppliers to act (cf. ‘Gas sector’, first and second row). While these examples illustrate how context factors generally affect the Bio-SNG field and different actors cooperating in one way or the other, there is of course still much leeway in every specific situation. Recent planning processes for Bio-SNG plants (cf. Table 1) have revealed many particularities that can not be covered by such a general analysis. The presented analyses, in other words, can point to some general influences without making predictions whether these will decisive in every situation. To summarize, supra-regional utilities and/or large local gas suppliers are likely to play a dominant role in a future business model for large Bio-SNG plants in

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Switzerland. However, a close cooperation of a range of actors, especially with regard to local forest owners or sawmill owners seems also necessary. Against this background, an integrated business model or even a common corporation might be suited to handle the complexity that comes along with financing, adequately supplying and operating Bio-SNG plants.

5 Summary and Conclusions Our analysis of the prospects for the development of Bio-SNG in Switzerland has revealed that structures and developments in the context of the emerging technological field have a decisive impact. In the case at hand, the context influences the availability of input materials as well as the organizational options for which we can see fit. The Bio-SNG case also shows that – for a novel technology – relevant context structures might have their origin in a range of different sectors, each characterized by specific actor groups, their competences and institutional settings. Such multi-sectoral linkages can considerably increase the complexity of technology development. Finally, the case has also directed our attention to competition among technologies. In Switzerland, the recent boom in wood-to-energy plants that favors 1st generation technologies significantly reduces the chances for Bio-SNG as a 2nd generation technology. This is embodied in the decisions of actors from the identified relevant sectors. Due to the dynamics that enfold in such a situation of competition and limited supply, we might even see a technological lock-in favoring those technologies that had a head start at a certain point in time. A crucial point is that in the Bio-SNG case these dynamics were even reinforced by political support directed at the broader field (here: bioenergy). In the following we will summarize our empirical findings in some more detail and elaborate on their broader implications. Future Bio-SNG plants require a certain size (around or above 20 MW) in order to become financially viable and reap economies of scale. For plants of this size, however, wood supply will be a major challenge. In Switzerland, two recent developments, the expansion of sawing capacities (material use of wood) and the boom in using wood as an energy source, have made wood an increasingly scarce resource. While this has also triggered changes in the wood market (allocation of assortments, greater attention to energy wood, intermediaries in logistics and brokering), the general outcome is that large amounts of wood are bound in long-term contracts. The boom in energy wood was recently also triggered by environmental policies (especially feed-in tariffs) that have the goal to foster renewable energy generation. So, while for the broader field of bioenergy technologies the observed development was certainly intended, there is a drawback for the Bio-SNG field. The chances for testing and furthering upcoming technological alternatives such as Bio-SNG were reduced more quickly than under circumstances without public support. Moreover, electricity feed-in schemes also have a direct selection effect as they favor technologies designed for power generation over alternative approaches with a focus on

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gas generation, for example. Recent investments in wood-to-energy plants by municipal and regional utilities have favored conventional, 1st generation technologies, which are technologically robust and entail much lower risks. 1st generation technologies, however, cannot produce relevant quantities of highly valuable secondary energy carriers like electricity or methane gas (or just at much lower efficiencies than Bio-SNG). As a consequence, we face a development where 1st generation technologies expand at the expense of alternative investments in 2nd generation technology projects. Without such projects, however, technological advances in e.g. Bio-SNG will be difficult to achieve. It can thus be concluded that for the lifetime of 1st generation technologies, the economic lifetimes of woodto-energy plants are 20 years and above, the opportunities for Bio-SNG projects will remain low for quite some time. Despite this general trend, there might still be some local windows of opportunity for the novel technology. Examples for such opportunities include a strategic re-orientation of a large public forest owner concerning the sale of its wood assortments, the opening respectively expansion of a sawmill or the close-down of a production site of an industry wood processor. Especially in situations, in which local heat demand is low, Bio-SNG has an advantage over conventional wood-to-energy plants due to its low amount of heat production. Another advantage is a broad regional availability of the natural gas infrastructure in the sense of a technological complementarity. Both, low heat generation and wide accessibility of the gas grid contribute to the particular flexibility of Bio-SNG in exploiting such windows of opportunity. Our analysis shed light on the role different actors (or actor groups) may play in the emerging field. Due to the critical issue of wood supply, for example, a BioSNG plant business model in which a large public forest owner or a sawmill operator is organizationally included seems to be favorable (cf. Table 2). Due to their access to critical resources these actors have to be tied more or less closely to a Bio-SNG project. Still, it is to be expected that forest owners or sawmill operators just play a complementary role as they typically do not possess the technological and financial capabilities to run a Bio-SNG plant. This is where utility companies may enter the scene. Especially supra-regional electricity suppliers may be crucial with their engineering and technical processing know-how and the financial capital they have at their disposal. For taking up and distributing Bio-SNG, possibly as a green gas product, gas suppliers may also be part of a future business model. The influencing factors from the different sectors, energy policy included, seem to favor central roles of electricity utilities and – to a lesser extent – gas suppliers (cf. Table 8). It has to be noted though that in addition to these general contours of a future business model further variants are conceivable. Especially with regard to specific regional configurations, it seems to be important to account for local/regional utilities, which may enter due to political interests. Furthermore, bridging of the electricity and gas sector could lead to a robust variant for operating a Bio-SNG plant, by founding a separate operating company, for example. The clue seems to be a balanced combination of local actors (e.g. large public forest owner, large local

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gas supplier resp. municipal utility) and of regional resp. supra-regional actors (e.g. large sawmill, cantonal utility, supra-regional electricity utility). Our insights in terms of context sectors and how they affect not only technological development options but also potential business models for Bio-SNG plants and the approach to systematically analyze context structures and to assess their influences on the emerging technological field under study are certainly promising.

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Identifying Typical (Dys-) Functional Interaction Patterns in the Dutch Biomass Innovation System Simona O. Negro and Marko P. Hekkert

1 Introduction Innovation is increasingly being considered crucial to deal effectively with the negative side effects associated with economic growth. Influencing the direction of innovation towards more sustainable paths is high on many political agendas. Issues like global warming, the security of energy supply, local air pollution, and the negative social effects of economic growth have strongly contributed to these insights. In recent literature, a structural re-orientation of economic activity towards sustainability has been labelled as a process of sustainable socio-technical change, industrial transformation and (socio-) technological transitions (Rohracher 2001; Rotmans et al. 2001; Geels 2002; Brown et al. 2003; Vergragt 2004; Smith et al. 2005; Kemp et al. 2007). In these contributions, the emphasis lies on the development of new modes of governance to support these processes, e.g., transition management at the level of societies and strategic niche management and sociotechnical experiments at the level of specific innovation processes (Vergragt 2004; Smith et al. 2005; Kemp et al. 2007; van der Laak et al. 2007; Brown and Vergragt 2008). Due to different disciplinary backgrounds, only a limited number of insights from the field of innovation studies are being applied to this new and rapidly growing field of sustainable socio-technical change. This is remarkable, since innovation is a key process in sustainable socio-technical change and the field of innovation studies has provided a vast number of insights into the factors that explain processes of innovation and into the type of policy frameworks that support innovation.

S.O. Negro (*) • M.P. Hekkert Department of Innovation Studies, Copernicus Institute for Sustainable Development and Innovation, Utrecht University, Utrecht, The Netherlands D. Jansen et al. (eds.), Sustainability Innovations in the Electricity Sector, Sustainability and Innovation, DOI 10.1007/978-3-7908-2730-9_10, # Springer-Verlag Berlin Heidelberg 2012

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One of the frameworks from innovation studies that could potentially contribute to understanding sustainable technological change1 is the innovation system approach. It has become a well-established heuristic framework in the field of innovation studies. It presents insight into the factors that explain processes of innovation (Lundvall 2002; Lundvall et al. 2002). The framework has been adopted as an analytical framework and as a guideline for science and innovation policy by numerous public organisations around the world (Commission 1996, 2002; OECD 1997, 1999a, b; Albert and Laberge 2007). Furthermore, a number of scholars have adopted the innovation system framework to study processes of socio-technical change and in many studies the focus was on emerging renewable energy technologies (Edquist and Johnson 1997; Galli and Teubal 1997; Johnson 1998; Jacobsson and Johnson 2000; Liu and White 2001; Rickne 2001; Bergek 2002; Carlsson and Jacobsson 2004; Jacobsson and Bergek 2004; Hekkert et al. 2007; Negro 2007; Negro et al. 2008a, b). More specifically, these authors have adopted the technological innovation system (TIS) approach as introduced by (Carlsson and Stankiewicz 1991). The focus of the TIS approach on the institutions and networks of agents involved in the generation, diffusion, and utilisation of a specific technology fits best with their interest in technological change compared to the national innovation systems (NIS) approach (Freeman 1987; Lundvall 1992) or the sectoral innovation (Malerba 2002) approach which both take a broader perspective. The central connection between a TIS and socio-technical change is that emerging technologies are developed and applied within a specific TIS context. When the technology matures, the TIS also grows, due to an increasing knowledge base, new entrants, growing networks in terms of size and density, and specific institutional arrangements that are put into place. On the other hand, when a TIS grows, the rate of technological progress generally increases, which in turn leads to increased chances of success for the technology in question. Thus, the maturation of a technology and the growth of a TIS are typical examples of co-evolution; they mutually influence each other. A novel addition to the earlier innovation system approaches is to relate innovation systems explicitly to general systems theory, an approach that has been used much more in natural sciences than in social sciences.2 This has led to a strong focus on innovation system functioning, since one of the characteristics of a “system” from a general systems perspective is that it has a function, i.e. it is performing or achieving something. This was not addressed systematically in the earlier work on innovation systems. Galli and Teubal (1997) started thinking in this direction, which was followed up by Johnson (1998); Jacobsson and Johnson

1 We use technological change and socio-technical change interchangeably. Technological change always co-evolves with changes in the social system. 2 Edquist (2001) is strongly in favour of making this connection since it might make the innovation system framework clearer and more consistent, to serve as a basis for generating hypotheses about specific variables within innovation systems.

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(2000); Liu and White (2001); and Rickne (2001). The primary goal of an innovation system is to contribute to the development and diffusion of innovations. The novelty of the work by the authors above is that they reflected on different subfunctions, which are considered to be important for an innovation system to develop and grow and, thereby, to increase the success chances of the emerging technology. In this article, when we use the term system function, we refer to these subfunctions instead of the goal of an innovation system. The TIS framework conceptualises the energy transition process as a building up process of different TIS. A TIS is the structure surrounding a new technology. This structure consists of actors, institutions (rules of the game) and relations between them. Analyses showed that this structure has a great influence on the success and failure of new technologies. The strong point of the TIS framework is that it conceptualises the growth process of emerging TIS and thereby sheds light on the dynamics of transition paths. Based on a large number of historical case studies, it became clear that a number of key processes are crucial in the construction process of emerging TIS (Hekkert et al. 2007; Negro et al. 2007; Bergek et al. 2008b; Negro et al. 2008b; Hekkert and Negro 2009; Suurs and Hekkert 2009b). These system functions are: 1. 2. 3. 4. 5. 6. 7.

Entrepreneurial activities Knowledge development Knowledge exchange Guidance of the search Market formation Resource allocation Counteracting resistance to change.

These system functions provide handholds for policymakers and other stakeholders to accelerate transition processes (Bergek et al. 2008a). We have empirically shown that when these system functions are well developed, they set in motion a range of positive feedback mechanisms that accelerate innovation system growth (Hekkert and Negro 2009). These are labelled “motors of change” (Suurs and Hekkert 2009b). This paper compares several biomass innovation systems in order to identify typical patterns of interactions that lead to virtuous or vicious cycles and thereby trigger or hamper the development of the respective innovation systems. This paper is structured as follows. The theory and concepts used, such as the innovation system and system functions approach, are further described in Sect. 2. A short overview of the process method is described in Sect. 3. Section 4 summarises the findings from our earlier case studies on technological innovation system dynamic, such as biomass digestion in the Netherlands (Negro et al. 2007) and Germany (Negro and Hekkert 2008), biomass gasification in the Netherlands (Negro et al. 2008b), and biomass combustion in the Netherlands (Negro et al. 2008a). In Sect. 5 we present a cross-case analysis by combining the insights from the case studies. Section 6 concludes and discusses limitations.

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2 Innovation Systems and System Functions There are several definitions of innovation systems mentioned in the literature, which all have the same scope and are derived from one of the first definitions (Freeman 1987): . . .systems of innovation are networks of institutions, public or private, whose activities and interactions initiate, import, modify, and diffuse new technologies

Usually, when innovation systems are studied at a national level, the dynamics are difficult to map, due to the vast number of agents, relations, and institutions. Therefore, many authors who study and compare national innovation systems (NIS) focus on their structure. Typical indicators to assess the structure of the NIS are R&D efforts, qualities of educational systems, university-industry collaborations, and the availability of venture capital. Thus, most empirical studies of innovation systems do not focus on mapping the emergence of innovation systems and their dynamics (Hekkert et al. 2007). However, in order to understand technological change, insights into how the innovation system around a new technology is structured are needed. Thus insights into the dynamics of the innovation system are necessary. Fortunately, the number of agents, networks, and relevant institutions in a technological innovation system (TIS) are generally much smaller than in a national innovation system, which reduces the complexity. This is especially the case when an emerging TIS is being studied. Generally, an emerging innovation system consists of a relatively small number of agents and only a small number of institutions are aligned with the needs of the new technology. Thus, by applying the TIS approach, it becomes possible to study dynamics and to come to a better understanding of what really takes place within innovation systems (Hekkert et al. 2007). According to Carlsson and Stankiewicz (1991) (p. 94), a TIS is defined as: a network or networks of agents interacting in a specific technology area under a particular institutional infrastructure to generate, diffuse, and utilise technology

This implies that there is a technological system for each technology and that each system is unique in its ability to develop and diffuse a new technology (Jacobsson and Johnson 2000). A TIS that functions well is a requirement for the technology in question to be developed and widely diffused. The question remains, however, what determines whether or not a TIS functions well, other than defining success by the end result, i.e. a high level of technological diffusion? Edquist states that “the main function – or the ‘overall function’ of an innovation system is to pursue innovation processes, i.e., to develop, diffuse and use innovations” (Edquist 2004) (p. 190). In order to determine whether a TIS functions well or not, the factors that influence the overall function – the development, diffusion, and use of innovation – need to be identified. Jacobsson and Johnson (2000) developed the concept of system functions, where a system function is defined as “. . .a contribution of a component or a set of components to a system’s performance”. They state that a TIS may be described and analysed in terms of its “functional pattern”, i.e. how these

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functions have been served (Johnson and Jacobsson 2000). The functional pattern is mapped by studying the dynamics of each function separately as well as the interactions between the functions. The system functions are related to the character of, and the interaction between, the components of an innovation system, i.e. agents (e.g. firms and other organisations), networks, and institutions, either specific to one TIS or “shared” between a number of different systems (Edquist 2001). Recently, a number of studies applied the system functions approach, which led to a number of system functions lists in the literature (Edquist and Johnson 1997; Galli and Teubal 1997; Johnson 1998; Jacobsson and Johnson 2000; Liu and White 2001; Rickne 2001; Bergek 2002; Carlsson and Jacobsson 2004; Jacobsson and Bergek 2004; Hekkert et al. 2007). This paper uses the recently developed list of system functions at Utrecht University (Hekkert et al. 2007; Negro 2007; Negro et al. 2008a, b) that will be applied to map the key activities in innovation systems, and to describe and explain the dynamics of a TIS.

2.1

Function 1: Entrepreneurial Activities

The existence of entrepreneurs in innovation systems is of prime importance. Without entrepreneurs, innovation would not take place and the innovation system would not even exist. The role of the entrepreneur is to transform the potential of new knowledge development, networks and markets into concrete action to generate and take advantage of business opportunities.

2.2

Function 2: Knowledge Development (Learning)

Mechanisms of learning are at the heart of any innovation process. For instance, according to Lundvall: “the most fundamental resource in the modern economy is knowledge and, accordingly, the most important process is learning” (Lundvall 1992). Therefore, R&D and knowledge development are prerequisites within the innovation system. This function encompasses “learning by searching” and “learning by doing”.

2.3

Function 3: Knowledge Diffusion Through Networks

According to Carlsson and Stankiewicz (1991), the essential function of networks is to exchange information. This is important in a strict R&D setting, but especially in a heterogeneous context where R&D meets government, competitors and market. Here policy decisions (standards, long-term targets) should be consistent with the latest technological insights and, at the same time, R&D agendas are likely to be affected by changing norms and values. For example, if there is a strong focus in society on renewable energy, it is likely that a shift in R&D portfolios will occur

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towards a higher share of renewable energy projects. This way, network activity can be regarded as a precondition to “learning by interacting”. When user-producer networks are concerned, it can also be regarded as “learning by using”.

2.4

Function 4: Guidance of the Search

The activities within the innovation system that can positively affect the visibility and clarity of specific wants among technology users fall under this system function. An example is the announcement of the policy goal to aim for a certain percentage of renewable energy in a future year. This grants a certain degree of legitimacy to the development of sustainable energy technologies and stimulates the mobilisation of resources for this development. Expectations are also included, as occasionally expectations can converge on a specific topic and generate a momentum for change in a specific direction.

2.5

Function 5: Market Formation

A new technology frequently has difficulties to compete with incumbent technologies, as is often the case for sustainable technologies. Therefore it is important to create protected spaces for new technologies. One possibility is the formation of temporary niche markets for specific applications of the technology (Schot et al. 1994). This can be done by governments but also by other agents in the innovation system. Another possibility is to create a temporary competitive advantage by favourable tax regimes or minimal consumption quotas, activities in the sphere of public policy.

2.6

Function 6: Resource Mobilisation

Resources, both financial and human, are necessary as a basic input to all the activities within the innovation system. Specifically for biomass technologies, the abundant availability of the biomass resource itself is also an underlying factor which can determine the success or failure of a project.

2.7

Function 7: Creation of Legitimacy/Counteracting Resistance to Change

In order to develop well, a new technology must become part of an incumbent regime, or has to even replace it. Parties with vested interests will often oppose this force of “creative destruction”. In that case, advocacy coalitions can function as catalysts to create legitimacy for the new technology and to counteract resistance to change.

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Both the individual fulfilment of each system function and the interaction dynamics between them are important. Positive interactions between system functions could lead to a reinforcing dynamics within the TIS, setting off virtuous cycles, i.e. “motors of change” that lead to the diffusion of a new technology. An example of a virtuous cycle that we expect to see regularly in the field of sustainable technology development is the following. The virtuous cycle starts with F4: guiding the search. In this case, societal problems are identified and government goals are set to limit environmental damage. These goals legitimise the mobilisation of resources to finance R&D projects in search of solutions (F6), which in turn, is likely to lead to knowledge development (F2) and increased expectations about technological options (F4). Thus, fulfilment of the individual functions is strengthened through interaction. Vicious cycles are also possible, where a negative function fulfilment leads to reduced activities in relation to other system functions, thereby slowing down or even stopping progress.

3 Methodology All empirical cases compared in this article used a similar method to analyse innovation system dynamics. The method used to map interaction patterns between system functions is inspired by the process method called “Historical Event Analysis” as used by Van de Ven and colleagues (Van de Ven et al. 1999; Poole et al. 2000). Stemming from organisational theory, the usual focus is on innovation projects in firms and firm networks; in our case, the analysis is applied to a TIS level (Negro 2007; Negro et al. 2007). Basically, the approach consists of retrieving as many events as possible that have taken place in the innovation system using archive data, such as newspapers, magazines, reports and professional journals. The events are stored in a database and classified into event categories. Each event category is allocated to one system function by an indicator as shown in the classification scheme. The classification scheme presented is specific to the analysis of renewable energy cases (see Table 1). The final outcome of the process analysis is a narrative (story line) of how the development of the TIS changed over time and the role of the different system functions within this development. In the narrative, the focus is on extracting interaction patterns between system functions. We limit ourselves to a very short stylised description of each case where just the main interaction patterns between system functions are stated. For a more detailed description, we refer to the original articles (Negro et al. 2007, 2008a, b; Negro and Hekkert 2008; Suurs and Hekkert 2009a, b). Based on the content of the events and their chronological order, we are able to deduce the effect of one event on another and the order in which such events occurred. By observing reoccurring sequences of events, we are able to identify interaction patterns between system functions. We use cross-case analysis to test

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Table 1 Operationalisation of System Functions System Functions Event categories Function 1: Project started Entrepreneurial Activities Project stopped Function 2: Desktop/Assessment/Feasibility studies on the technology Knowledge Development Function 3: Workshops, Conferences Knowledge Diffusion Function 4: Positive expectations of the technology; Guidance of the Search Government regulations Negative expectations of the technology; Expressed deficit of regulations Function 5: Specific favourable tax regimes and environmental standards Market Formation Expressed lack of favourable tax regimes or favourable environmental standards Function 6: Subsidies, investments for the technology; Resource Mobilisation Biomass streams allocated to the project Expressed lack of subsidies, investments; Shortage of biomass streams allocated to project Function 7: Lobby activities for the technology; Advocacy Coalition Support of technology by government, industry (Creation of Legitimacy/ Lobby activities against the technology; Counteract Resistance of Expressed lack of support by government, industry Change)

Sign þ1 −1 þ1 þ1 þ1 −1 þ1 −1 þ1 −1 þ1 −1

whether these patterns are case-specific or whether they hold more generally. Insights into these patterns are the first step towards policy recommendations regarding the governance of this set of TIS (Hekkert et al. 2007).

4 Overview of the Dynamics of Biomass Case Studies In this section, we start with the description of one success case that shows how a virtuous cycle evolved. Then we describe two cases where virtuous and vicious cycles alternate. We end with a case where hardly any system functions interact.

4.1

Virtuous Cycles Evolving

We will start with the case of biomass digestion in Germany (Negro and Hekkert 2008). Biomass digestion is a process to produce a gaseous fuel from organic waste or manure. The main adopters in Germany are farmers who seized the opportunity to convert their excess of manure into renewable energy. The innovation system started to take off when the German government introduced the Electricity Feed-in

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Act in 1990. This act states that producers of renewable energy are compensated for higher production costs compared to conventional electricity. This act guides the direction of search (F4) towards renewable energy technologies. Biomass digestion was recognised by entrepreneurs as a key technology to produce renewable energy and they started to create and diffuse knowledge (F2, F3), which led to the establishment of the first digestion plants (F1). The first trials showed however that the current legislation wa not sufficient to make a good business case for biomass digestion. Lobby activities (F7) by the German Biogas Association tried to have the institutional conditions changed. They were successful, as shortly afterwards the German government increased the feed-in rates in 1998 (F4). The level of the feed-in tariffs was such that a first market formed for biomass digestion (F5), which resulted in the construction of initially about 200 plants each year (F1), with the outcome that by the end of 2003 about 1,750 plants were standing. However, the German Biogas Association and entrepreneurs were not satisfied with the institutional conditions and undertook additional lobby activities (F7) to improve institutional conditions (F4). These requests were quickly heard by politicians, due to the presence of the Green Party in parliament, and in 2004 still higher feed-in tariffs were introduced (F4) that were guaranteed for a period of 20 years, thereby strongly reducing the uncertainties for entrepreneurs. The feed-in tariffs led to a market formation, which led to the final breakthrough for biomass digestion in Germany (F1), i.e. 2,700 plants in 2005. This case shows that the positive interactions between six system functions explain most of the dynamics. The interplay between guidance of the search by the government, entrepreneurial activities, lobby activities to counteract resistance to change and market formation prove to be dominant. Also resource mobilisation through different subsidy programmes and knowledge development contributed to the dynamics. Only the role of knowledge diffusion was difficult to verify with the empirical data, but with hindsight, it seems fair to assume that much knowledge diffusion must have taken place between the farmers (adoptors, entrepreneurs) and the technology suppliers (entrepreneurs) to improve the technology and achieve such a high diffusion in different regions.

4.2

Virtuous and Vicious Cycles Alternating

The case described above shows mainly positive interactions between system functions. This is quite exceptional. In most cases virtuous cycles alternate with vicious cycles. This is the case of biomass co-firing in the Netherlands (Negro et al. 2008a). This implies adding biomass as a feedstock to existing coal-fired power plants. This add-on technology is quite simple compared to most other sustainable energy technologies. Moreover, in this innovation system the agents, power plants and infrastructures are already in place, as part of the incumbent system. It is interesting to see whether the dynamics and sequence of events are different compared with the other case studies where the infrastructures and important actors

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are not in place yet. The sequence of events started with guidance by the government, stimulating the energy companies to reduce CO2 emissions (F4). The energy companies complied by publishing an “Environmental Action Plan”. This changed the direction of search towards alternatives for coal as feedstock. Co-firing was quickly recognised as a very promising option (F2). Mr Ketting, the director of the United Electricity Producers (SEP), considered the use of large-scale electricity plants as a solution to the waste problem. By co-firing waste wood, a certain percentage of coal is replaced which reduces emissions; the waste wood is usefully processed (EnergieConsulent 1992). The government supported the ambitions of the energy companies to replace a certain percentage of coal with biomass, by providing resources (F6) and forming a market (F5) (the power producers received a subsidy for each kWh produced with biomass). This led to the quick introduction of co-firing (F1), by 2000 most of the Dutch coal plants co-fired permanently up to 5% of biomass in their plants. However, unclear and contradictory regulations (on the type of biomass and emission rules) regarding biomass co-firing (F4), temporarily delayed the entrepreneurial activities (F1). Lobby activities by the energy companies (F7) led to agreements with the government about new institutional conditions that are well aligned with the needs of biomass co-firing technology (F4). On top of this, the government formed an additional market for biomass cofiring by negotiating another voluntary agreement with the coal sector to reduce CO2 emissions (F5). This was the final trigger to implement co-firing in all coalfired power plants (F1). The prominent role of the energy companies in lobbying for favourable conditions in order to facilitate biomass co-firing in their coal plants is easily understandable when comparing the options they had to reduce CO2 emissions. The target set by the government to reduce the CO2 emissions by 20% in the short term and 40% in the long term can only be realised if they switch from coal to natural gas, close down the coal plant, or co-fire biomass. The third case also showed alternating virtuous and vicious cycles, but now the vicious cycle dominated. The case of biomass gasification in the Netherlands (Negro et al. 2008b) involved advanced technology to convert biomass very efficiently into electricity and heat. The biomass gasification innovation system started with the recognition of the potential of this technology by a small group of energy specialists. Positive experiences in Finland (F3) guided these Dutch energy specialists to focus on this novel technology (F4). A waste surplus problem and the climate change issue helped to put this technology on the political agenda (F4). Several desktop and feasibility studies on biomass gasification provided very positive results (F2). Due to these positive results and the great enthusiasm of the energy experts, the expectations (F4) of the entrepreneurs and government were boosted to high levels in a short time span. As a natural consequence, subsidies were provided for research (F6) and research programmes were launched (F2). The great enthusiasm and highly strung expectations arising from positive results obtained from the research programmes, led to the setting-up of two biomass gasification projects (F1). The above showed a strong virtuous cycle during the period 1990–1998, where positive expectations (F4) strongly influenced positive system dynamics. However, the virtuous cycle was terminated after a very short

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period of time by one key event: the liberalisation of the energy market. Energy companies started competing for customers by means of low energy prices, which led to the termination of unproven, risky projects. A vicious cycle started to form. The lack of support from energy companies (F4) resulted in less knowledge creation (F2), less investments (F6), less resources (F6) and above all negative expectations (F4). These negative events reinforced each other with the outcome that no activities are carried out anymore, so that the system collapsed within a couple of years. Until now, biomass gasification still has not diffused on a large scale in the Netherlands. To summarise, the case studies described above show that the interactions between system functions lead to the (temporal) construction or deconstruction of emerging innovation systems. Virtuous cycles occur when several system functions are fulfilled, interact and reinforce each other. The question remains whether it is possible to have an innovation system where different functions are fulfilled, but where no or only limited interactions take place. What type of dynamics follows from such a lack of interaction?

4.3

System Dynamics with Limited Interaction Between System Functions

To illustrate a dynamics with limited interaction, we turn to the case of biomass digestion in the Netherlands (Negro et al. 2007), which stands in sharp contrast to the successful development of this technology in Germany (see Sect. 4.1). Two observations stand out in this case. First, an irregular functional pattern is observed, as positive and negative system functions seem to take alternative turns every so many years. Second, during most periods only a limited number of system functions are fulfilled. In the early emergent period of the biomass digestion innovation system (1974–1987) only the system functions knowledge development (F2) and entrepreneurial activities (F1) occur, as several pilot plants were set up as a solution to the manure surplus problem (F4). However, no other system functions were triggered. In the following years, as the manure surplus problem remained unsolved, negative guidance against biomass digestion (F4) severely hindered market formation (F5) and investments (F6). Surprisingly, very little lobby activities occurred (F7). The biomass digestion entrepreneurs seemed not to be very well organised. Only in 1989 did a cautious build-up of system functions occur, when guidance (F4) due to a waste surplus, where biomass digestion seemed to be a potential solution, stimulated the knowledge creation and diffusion (F2 and F3) of biomass digestion, resulting in the establishment of several plants (F1), i.e. seven plants in 1992. However, system functions, such as market formation (F5) and resource mobilisation (F6) remained unfulfilled. Lobby activities were also too scarce to improve institutional conditions for digestion. One of the institutional barriers to manure digestion was that it was not allowed to add other biomass feedstock to the

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digester, a process referred to as co-digestion. If this were allowed, the biogas output of a digester and thereby also the profitability of the plant could be greatly increased. In 1995, the positive guidance turned into negative guidance (F4), as biomass digestion was not recognised by the Dutch government as a renewable energy technology. Where the German entrepreneurs were able to show the German government that digestion was a functioning renewable energy technology that deserved support, the Dutch digestion sector did not manage this. No additional resources were therefore made available (F6), forcing several plants to shut down (F1). In 2003, the Dutch government aimed to increase the share of green electricity (F4) and introduced a feed-in tariff system (F5). Due to this change in institutional conditions, agents of the biomass digestion sector saw an opportunity to profit from this market formation (F5) and this time started a successful lobby to allow co-digestion and to put biomass digestion as a renewable energy technology onto the political agenda (F7). Finally, an increase of biomass digestion plants occurred between 2004 and 2006 (F1). To summarise, between 1974 and 2003 no continuous build-up of system functions occurred. Some system functions were fulfilled, but they did not mutually interact to reinforce each other and trigger other system functions. This led to a scattered functional pattern that led to an innovation system that was essentially based on “muddling through”, resulting in a very low diffusion rate of the technology in question. However, it still provides a basis for virtuous cycles at a much later stage when the institutional conditions have changed.

5 Identifying Typical Interaction Patterns 5.1

The Importance of System Functions

Before identifying typical interaction patterns, a general understanding of the fulfilment of the individual system functions is needed: • Entrepreneurial activities (F1) are a prime indicator of whether an innovation system is progressing or not. First, we observed that it is a very good indicator of technology diffusion. In most cases, technology diffusion developed in line with entrepreneurial action. Second, entrepreneurial activities proved to be a central function that connects other system functions and thereby adds to the occurrence of virtuous cycles. We often observed knowledge creation (F2) being followed by entrepreneurial activities and in turn entrepreneurial activities triggering many other system functions. • Knowledge development (F2) is also important in all cases. This is not surprising since we studied complex technologies in the early stages of emergence where uncertainty about technological performance is high. It is only natural that much R&D is necessary to solve technological problems and create a technology with

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acceptable specifications. Very often knowledge development preceded entrepreneurial activities or co-evolved with them. Thus entrepreneurs only dare to invest in new technological trajectories when a minimal knowledge base is present. When they do invest, the many technological problems they encounter are solved by additional R&D efforts. An important finding is that knowledge development needs to be defined much more broadly than just knowledge about “how a new technology functions or performs”. Very often important processes of knowledge development are related to creating insights on the fit between new technologies and (1) existing business practices, and (2) existing or new regulations. Another interesting finding with respect to knowledge development is that most of these novel technologies are “new combinations” of already existing technologies, either transferred from another sector (digestion technology was already used in the 1970s for wastewater treatment) or used with a different feedstock (biomass gasification benefited from experience with coal gasification). • The role of knowledge diffusion (F3) is much more difficult to map. We were able to measure events where knowledge diffusion is likely to take place, such as workshops, conferences and technology platforms. However, the actual knowledge diffusion processes could not be measured in this way. Also much knowledge diffusion takes place in dyadic relationships that are not reported in literature. So, many of the knowledge exchange processes do not become visible using this method. By interviewing agents in the innovation system, much more insight can be gained in the fulfilment of this function. Thus, the quantitative method is not the optimal one for measuring this function. In many trajectories we observe strong improvements in technological performance that matches the needs of technology users. Implicitly, we may assume that knowledge diffusion and even learning has taken place. • Guidance of the search (F4) is an important system function. It stands at the base of many developments and leads to several courses of action, either positive or negative. We observed that strong guidance motivated entrepreneurs to enter a new technological field and that guidance directly influenced the amount of resources allocated to knowledge development. We also observed that a lack of guidance made the entrepreneurs reluctant to invest. Shifts in positive and negative guidance were mirrored by increasing and decreasing entrepreneurial activities. Also, most of the frustration of entrepreneurs in emerging innovation systems was due to rapid shifts in guidance and not so much to other factors, like problematical technological performance and availability of capital. • Market formation (F5) is often addressed at an advanced state of development, but it can significantly accelerate the emergence of the TIS. For example, we observed that the success of biomass combustion in the Netherlands was directly related to fulfilling the system function “market formation”. All other system functions are in place and a direct relation is visible between a well-functioning system function: market formation and system growth. Just like the guidance function, the rapid shifts in market formation had strong effects on innovation

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system development. It proved to be difficult for the (Dutch) government to provide consistent policy with regard to guidance and market formation. • Resource mobilisation (F6) turned out to be relevant in each case study. Many knowledge development projects were started via (public) allocation of resources. It proved much more difficult to mobilise resources to build and construct plants. Both government and private investors were hesitant to make these necessary investments. The reluctance on the part of private investors was directly related to political uncertainty (guidance). During some periods, large sums were invested to create a market. However, the political commitment to sustain the investments for market formation was often unstable. This led to the earlier described shifts in guidance and market formation. Only in the German case did we observe a very stable institutional setting to allocate the resources needed for market formation. • Finally, the creation of legitimacy (F7) transpired to be of utmost importance. It is a crucial function that positively helps to align institutions to the need of agents in emerging innovation systems. We observed that the absence of this system function is often an indicator for a poorly functioning innovation system and a weak alignment between institutions and the needs of the emerging innovation system. In most cases the interests of the incumbent innovation system are very well advocated by incumbent lobbying coalitions with enormous lobby power. It proved difficult in most emerging TIS to form advocacy coalitions with enough strength to shape the existing institutional conditions to their needs. We observed that the agents in an emerging innovation system do not easily group together to form a tight network with a clear and strong standpoint. Often, different visions on the best technology and ways to proceed impede the formation of strong coalitions. Based on the observations above, we conclude that all seven system functions are important variables that influence the realisation of technological innovation systems.

5.2

Are Some Interaction Patterns Generic for Innovation System Dynamics?

Other observations made from the case studies relate to the specific interactions between system functions, key drivers and starting points of the virtuous cycles. For the majority of the virtuous cycles, an important starting point seems to be the urgency of the government to comply with national or international goals on energy or climate change (F4) which triggers research for solutions (F2). In most cases the sequence guidance of the search (F4) – > knowledge development (F2) is observed. Often financial resource mobilisation (F6) is required to make knowledge development possible. This contradicts the linear model where innovation processes are believed to start with either technology push or market demand. Our analysis of

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innovation system dynamics around sustainable technologies shows that pressure on the incumbent system to look for alternatives and expectations about novel technological trajectories often explain the start of new search processes. These forms of guidance are a much more indirect mode of technology push and market pull than is assumed by the linear model. Thus most of the sequences start with guidance (F4) and continue with knowledge development (F2), via resource mobilisation (F6). Following this sequence of events, subsequent scenarios all differ from each other, since different agents are involved who act and react in different ways. This shows that the dynamics are complex and that there is not one ideal way to go. The technology characteristics are another aspect that needs to be considered. A well-functioning, reliable and profitable technology is likely to gather more support and enthusiasm from entrepreneurs, investors and policymakers than a technology that is expensive and unreliable. Thus, positive technological characteristics will result in an easier fulfilment of system functions (e.g. co-firing and combustion). Incumbent actors especially such as energy companies are less reluctant to adopt and lobby for technologies that are similar to their current technologies. In other words, the technological characteristics are very important and influence the fulfilment of the system functions. This also works the other way round, as the system functions influence the technological characteristics (e.g. biomass gasification where no space and time was provided for the technology to develop further and for agents to experiment and gather experience). In most of the cases an innovation system needs to be constructed from scratch around a new technology. Usually the existing actors, such as energy companies and utilities, resist the change to something new as their business might be endangered, and institutions (tax exemptions, subsidies etc.) are not aligned to the needs of the new technology. In the case of co-firing, the energy companies embrace co-firing as the best solution to comply with the CO2 reduction targets. The energy companies lobbied for favourable institutional arrangements and implemented biomass co-firing in their coal plants. The contrary occurred for biomass gasification, where the energy companies withdrew all support for gasification projects the moment that the energy market was liberalised, as the technology was unreliable and expensive, which led to the collapse of the biomass gasification innovation system. Finally, the maturity of the technology affects the functioning of the innovation system. When the technology is still in a nascent stage, system functions like knowledge diffusion and guidance are more important to the functioning of the innovation system than market formation. However, the exact relationship between maturity of the technology and the importance of each of the system functions is still unknown and more research is necessary in this area. Technology development and establishing the innovation system thus co-evolve in relation to each other. Fulfilling the seven system functions and thereby consolidating the innovation system depend on expectations about the technology itself. Therefore technology development should be successful as to sustain these

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expectations. At the same time, the system functions are required to stimulate technological development and to raise expectations.

6 Conclusions 6.1

Functions Interact with Each Other

Other than merely testing the system functions we also explored whether system change is related to virtuous and vicious cycles. We compared several case studies of different emerging technologies and observed that indeed the positive interaction between system functions is a very important mechanism for change, i.e. the breakthrough of emerging technologies. Negative interactions between system functions on the other hand hamper the diffusion of the technology and in some cases lead to the collapse of the innovation system. For most case studies we observed that virtuous and vicious cycles alternated, and that a domination of virtuous cycles is the exception.

6.2

Certain Patterns Are Observed (Some Functions Are of Extraordinary Importance)

When the dynamics of virtuous cycles are more specifically observed it becomes clear that a number of system functions play an especially important role. A rise in entrepreneurial activities (F1) is observed when the system functions such as guidance of the search (F4) and/or market formation (F5) are well executed. In several cases the positive guidance (F4) leads to an increase in entrepreneurial activities (F1), but a breakthrough does not occur until a market is formed (F5) that provides entrepreneurs and investors with a long-term, stable perspective. Clear guidance and a well functioning market formation are in turn strongly influenced by the pressure that the entrepreneurs exercise the authorities. A well organised and capable group of entrepreneurs is crucial to build up expectations about the new technology and to successfully influence public policy to adjust the institutional framework conditions so that they are better suited to their needs.

6.3

Limitations

It is important to notice that all cases analysed in this paper deal with sustainable energy technologies. The dynamics of the innovation systems related to these technologies may be quite specific. The energy sector itself is conservative different governments have a very influential role in these trajectories, and innovation processes are strongly influenced by the societal need for clean energy and a reduction of carbon emissions. Further research is required to expand the empirical cases to different sectors and technologies.

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Acknowledgements The authors would like to thank the “Knowledge Network for System Innovations and Transitions (KSI)” and the “Netherlands Organization for Scientific Research (NWO)” for their financial support. Special thanks go to the editors and especially to Katrin Ostertag for her valuable comments and suggestions.

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