1. Innovation and MKT Dynamic Application to Renewables
Francesco Nicolli|
Innovation and MKT Dynamic
Application to Renewables

2. The Following discussion is based on this paper
Paroma Sanyal and Suman Ghosh. PRODUCT MARKET COMPETITION AND UPSTREAM INNOVATION: EVIDENCE FROM THE U.S. ELECTRICITY MARKET DEREGULATION.The Review of Economics and Statistics, March 2013, 95(1): 237–254

3. Market Structure – Negative Schumpeterian Effect
More competitive markets lower the appropriability of R&D investments; an increase in competition in the energy sector should lower the incentive for innovation.
(appropriability: innovator's ability to capture profits generated by an innovation)
The basic Shumpeterian assumption states that competition reduces innovative rents.
(In the energy market for instance competition may reduce the profitability of the down-stream sector [production-distribution; utilities], which translate to a lower demand for upsteam innovation [electric equipment manufacturers].

4. Market Structure – Escape competition
Aghion et al. (2001, 2005) developed models where an escaping competition effect counterbalances the standard appropriability effect. In order to retain their market shares, incumbents are induced to invest more in R&D if the competitive pressure of new entrants is higher and they (the incumbent) are close enough to the existing technological frontier. On the other hand, higher pressure of new entrants discourages R&D investments of incumbents far from the frontier, whose competences are too distant from the ones needed to imitate leading-edge technologies.

5. Upstream – Downstream (As in the energy Market)
In our setup there is a vertical organization structure where innovation is done by upstream equipment manufacturers and bought by downstream utilities.
The innovations were bought at an agreed-on price that was determined by the profits generated from the final product.

6. What Happend if we increase competition
On the one hand, the profitability of the incumbent utilities declined due to increased competition with nonutility generators (often called the independent power producers, IPPs). This affected the innovation incentive and competition in the upstream EEM sector.
On the other hand, the entry of these IPPs in the downstream generation market created new customers for the innovation product being sold by upstream EEMs.

7. First effect
in the presence of competitors (IPPs) in the down-stream sector, the pricing of the final goods (electricity price per megawatt-hour) to consumers would potentially change by becoming more competitive compared to the high regulated rates. This would reduce the profits of the incumbent downstream utilities. This decline in downstream profitability due to competition decreased the buying power of utilities and translated to a lower demand (from incumbent utilities) for upstream innovation

8. Pure competition effect
Increased competition (in this case, among downstream utilities after restructuring) reduces the monopoly rents that reward suc- cessful innovators (in this case, the upstream EEMs), and thus we expect declining downstream profits to dampen upstream innovation

9. Second effect – Escape Competition
if incumbent firms are allowed to innovate, then competition may actually increase innovation in certain cases.
greater competition ‘‘may increase the incremental profits from innovating and thereby encourage R&D investments aimed at ‘escaping competition’’’ (Aghion et al., 2001)
In the upstream/downstream setup, the downstream incumbent utilities buy more innovation from the upstream EEMs to escape competition

10. Which effect Prevail
According to Aghion et al. (2005), which of these two effects dominates depends on the industry structure— whether the industry is leveled (firms are neck-and-neck competitors) or whether it is unleveled (the industry has technological leaders and laggards) and the level of competition in the industry.

11. Why?
Their model predicts that the reduction of rents due to competition induces the neck-and-neck competitors to innovate to escape competition, whereas the Schumpeterian effect decreases the innovation incentives for the laggards. If the industry composition is such that it is characterized by a larger share of laggards, increased competition would decrease innovation as the negative Schumpeterian effect (the pure competition effect) would dominate the positive escape competition effect

12. Example from the Energy Sector
In the case of the electricity industry, we expect the negative pure competition effect to dominate the positive escape competition effect, leading to a negative net competition effect. A majority of the equipment manufacturers are small, privately owned firms, leading to an unleveled industry structure. In this case, the net effect of competition on innovation should be negative; as downstream profits fall due to competition, upstream innovation should decline as well

13. Market Structure – appropriation effect
Sanyal & Ghosh (2013) show as in the Energy sector, there is also an “appropriation effect”, which is due to the entry of the non-utility generation firms in the wholesale market (general producing renewables – DISTRIBUTED GENERATION). With an exogenous shift in downstream demand (i.e. exogenous from the point of view of the upstream Equipment Manufacturer (EEM)) due to Independent Power Producers (IPP) entry downstream, the size of the pie increases. These IPPs will demand newer kinds of technology and this 'demand-push' will incentivize EEMs to increase their innovation effort, since the upstream EEMs will now be able to capture a larger shares of this growing market.

14. Market Structure summary of effects on innovation
Renewable Energy
Fossil Fuel Energy
Schumpeterian -
Escape +
-/+
Appropriation

15. A study on renewables
Francesco Nicolli & Francesco Vona, "Heterogeneous policies, heterogenous technologies : the case of renewable energy," Sciences Po publications , Sciences Po Available Here:

16. Motivation
Empirical literature on environmental innovation focuses on the inducement effect of policies and energy prices (e.g. Popp 2002; Johnstone et al. 2010; Jaffe et al., 2003 )
Nesta et al. (2014) found a significant effect of energy market liberalisation on innovation in renewable energy technologies (RETs).
Another strand of literature examines the direction of technical change, and the role played by factor such as: price, size of the market and path dependency (Aghion et. Al., 2012; Calel and Dechezleprêtre, 2012)

17. Motivation
less attention has been paid, however, to the heterogeneous effects an equal policy or market stimulus exerts on the different RETs.
Lee and Lee (2013), proposed a taxonomy of RETs according to a set of indicators derived from the innovation
They identify six types of innovation patterns depending on the market structure and the degree of technological maturity and potential.

18. Aim of the paper
Assessing the heterogeneous effect of policy inducement and market regulation on 8 different Renewable energy technologies
We expand previous literature:
By allowing the effect of Renewable energy policies and market regulation to vary across technologies
By studying the effect of the single components of regulation (ENTRY – OWNERSHIP – VERTICAL INTEGRATION)
employing a dynamic specification that accounts for the accumulated stock of past knowledge
using the ratification of the Kyoto protocol as an exogenous shock for national-level policies in a diff-in-diff setting

19. Factors influencing renewable energy technology
Inducement hypothesis:
The negative effect of regulation on competitiveness in the short-term might be offset by the positive effect of regulation on innovation (seminal works of Porter, 1991 and Porter and Van der Linde, 1995).
Both quota systems and demand subsidies, which increase the market for renewable energy, are expected to stimulate innovation thanks to the higher expected return of R&D investments (Popp et al., 2009)
In presence of multiple externalities (pollution+ knowledge), a mix of policies is the optimal way to spur innovation (Jaffe et al., 2005; Acemoglu et al. 2011).

20. Competition
Schumpeterian effect: the entry of new players into downstream power production reduces the profitability of the incumbents, reducing their demand for upstream equipment manufacturer and consequently inhibiting upstream innovation. Escape competition effect: this reduction in the demand for upstream innovation would incentivise the equipment manufacturer to increase its innovative effort to escape competition. Appropriation effect: The entry of new players increases the overall demand for new technologies, increasing the incentive to innovate.

21. Heterogeneous effects - Competition
The effect of lowering the entry barriers depend on the level of each technology’s ‘developer intensity’, which measures the degree of concentration of innovation between firms
Low developer intensity  innovation activities are spread among firms and there are no technological leaders  escape competition effect prevail
High developer intensity  the industry is unlevelled, with few leaders and several followers  a Schumpeterian effect to prevail in the second
We expect the magnitude of the appropriation effect described in previous section to differ across technologies, and be stronger in RETs where the renewable energy production is decentralised into small- or medium-sized units.
H1: The effect of lowering entry barriers on innovation activities is expected to be positive for Wind, Solar Thermal and Waste technologies, which are characterised by both a lower developer intensity and the entrance of many independent producers.

22. Heterogeneous effects - Policies
Quantity-based and broad policies (like RECs), letting the producer free to pick the preferred options, tend to promote more mature and cost-effective technologies, such as wind, geothermal and solar thermal technologies, which guarantee lower short-run compliance costs. On the other hand, technology-specific policies, such as public R&D, and technology-specific price systems, such as feed-in tariffs, that allow differentiation and the specific pricing of individual technologies might be able to support emerging technologies such as solar PV. H2: The effect of broad policies is stronger for mature technologies, while emerging technologies are more responsive to technology-specific instruments

23. Heterogeneous effects
We expect, in particular, that technologies associated with a high technological potential are highly responsive to market conditions and, consequently, reacted more promptly and positively to an increase in the demand for clean energy, which can be driven by REPs, or to an increase in electricity consumption. technological potential, which measures the average patent growth rate of a technology (Holger, 2003) and is a rough proxy of its innovative potential. H3: The magnitude of the policy inducement effect, or more generally, of an increasing size of the energy market, is stronger for technologies with high technological potential such as wind, solar, marine and biofuel technologies and weaker or not present for technologies with low technological potential.

24. Other Factors Persistency of Past innovation (KNOW-STOCK )
Electricity prices (ELECT PRICE)
Per capita income levels (GDP_pc)
Electricity consumption (ELECT CONS)
New EU Countries

25. Data
We use patent counts (at the EPO) as our proxy for innovation performance. 8 sub-fields: wind, marine, solar thermal, solar photovoltaic, hydroelectric, waste, biofuel & geothermal. 19 EU Countries for years
Policies: we use the database compiled at the International Energy Agency (IEA) and previously used by JHP 2010.
Continuous data on RECs, FEED-IN and R&D.
Regulation: Index of Product Market Regulation developed by the OECD. Average of three sub-indices: entry barriers, vertical integration and privatization

26. PATENT TREND

27. PATENT by Country

28. Level of price guaranteed
INSTRUMENT
DESCRIPTION
CONSTRUCTION
Feed-in Tariff
Guaranteed price that may vary by technology. (Wind, Solar, Ocean, Geothermal, Biomass, Waste, Hydro).
Level of price guaranteed
Public Research and Development
Public financed R&D program disaggregated by type of renewable energy..
R&D (USD, 2006 prices and PPP).
Tradable Certificate
Renewable energy Certificates (REC) are used to track or document compliance with quota system and can generally be traded in specific markets.
Share of electricity that must be generated by ren or covered with a REC.
Kyoto Protocol
Ratification of the Kyoto Protocol.
Dummy Variable

29. Investment incentives
INSTRUMENT
DESCRIPTION
CONSTRUCTION
Investment incentives
Capital Grants and all other measures aimed at reducing the capital cost of adopting renewable energy technologies.
Dummy Variable
Tax Measure
Economic instruments used either to encourage production or discourage consumption. They may have the form of investment tax credit or property tax exemptions, in order to reduce tax payments for project owner.
Voluntary program
These programs generally operate through agreement between government, public utilities and energy suppliers, that agree to buy energy generated from renewable sources.
Obligations
Obligation and targets take generally the form of quota systems that place an obligation on producers to provide a share of their energy supply from ren energy. These quota are not necessarily covered by a tradable certificate.

30. Empirical analysis: knowledge stock
The inclusion of past knowledge stock accounts for path-dependency (Popp 2002).
As in Popp 2002, where β1, the rate of decay, and β2, the rate of diffusion.

31. PMR – Entry - Selected Countries

32. PMR – Vertical integration

33. & Public Ownership

34. Empirical strategy
Negative binomial fixed effect estimator, extended for dynamic by including the lagged knowledge stock.
The baseline specification refers to 19 EU Countries over the period 1977–2005.
EPO_PATit=f(β1 Log ELECT PRICEit + β 2 Log ELECT CONSit + β 3 Log GDP _pcit + β 4 PMRit + β 5 KNOW-STOCKit-1 + β 6 Log R&Dit + β 7 Log FEED-INit + β 8 KYOTO + β 9 Log RECsit + β 10 OTHER POLit + β 11 ENLARGit + β i+ β t)

35. Wind
Solar_th
Solar_PV
Marine
Hydro
Biofuel
Geotherm
Waste
K STOCK
0.0054***
0.0092** ** * *
0.0195***
PMR ENTRY
-0.322*** **
0.0959
0.0129
PMR VERT INT
0.0993
0.1298*
0.0686
PMR PUB OWN
0.0845
0.0207
0.0210
0.0063
0.3362
R&D
0.3926***
0.0054
0.0968
0.6356***
0.3600
0.1666**
0.4160**
FEED-IN
-5.139***
1.5440***
2.9548
0.4656
2.8425
KYOTO
0.4778**
0.1342
1.9649***
0.8407**
0.7505
1.7038***
0.5473
RECs
0.1526**
0.1938** *
0.0080
OTHER POL
0.0636
0.2623
0.4142**
0.6686*
0.1956
0.4505**
0.1827
ELEC PRICE
0.6341
9.1864**
14.359*** **
4.4071
15.468*** *
3.7185
ELEC CONS
2.0008***
2.0909**
0.5850
1.1801
1.6076*
GDP
1.6397*
1.5128*
1.2114
3.5998***
0.2730
2.6629
2.0857**
ENLARG ** *
0.2711
0.2461
0.2570
Country FE
Yes
Year FE N
495
448
429
475
346

36. Results Product Market Regulation:
the PMR indicator is statistically significant only for wind and solar thermal technologies.
among the three subcomponents of PMR, only PMR ENTRY drives the aggregate result, as it is statistically significant in the case of wind and solar thermal, in line with Hypothesis 1.

37. Results Renewable Energy Policy:
in line with Hypothesis 2, technology-specific policies appear to play a major role in the early phases of technological development (solar PV, marine), whereas for relatively more mature technologies, e.g., wind and solar thermal, quota systems are more effective policy tools   
R&D is a significant determinant of innovation for several RETs, such as wind, marine, biofuel and geothermal
future policy expectations as proxied by the KYOTO protocol dummy exert a significant and positive effect for wind, solar PV, marine and biofuel technologies.

38. Results Technological potential:
The effect of KYOTO, in line with H3, is stronger for technologies with an high tech potential
The evidence is mixed for the other cases.
Controls
ELEC PRICE is associated with a more robust outcome, as it is positive and statistically significant in five of the eight technologies analysed
ELEC CONS, is significant only for the two solar energy technologies
OTHER POL, controlling for all these policy instruments for which continuous information is not available, shows an expected positive and significant effect for solar PV, marine and biofuels

39. Conclusions
the aggregate effect of market liberalisation found in the previous literature is driven by technologies with a lower development intensity and more subjected to the entry of independent producers, such as wind and solar thermal energy.
the effect of REPs is heterogeneous across technologies and depends on their different degrees of maturity and technological potential.
KYOTO amplifies the effect of PMR, FEED-IN and R&D. This result confirms the complementarity between policy framework and the institutional context

40. SEEDS is an interuniversity research centre
SEEDS is an interuniversity research centre. It develops research in the fields of ecological and environmental economics, with a special focus on the role of policy and innovation