Regulators Can Help Clear the Way for Entrepreneurial Energy Companies to Innovate

A study points to one way to speed up adoption of innovations in clean energy technology – more flexibility among state regulators.

The Research Brief is a short take about interesting academic work.

The big idea

How regulatory policies are implemented can make a huge difference for entrepreneurs in clean technology. In a study, we found that giving state-level regulators more discretion in approving hydropower facilities in the United States led to faster adoption of this clean energy source.

We reviewed regulatory approvals of entrepreneurial hydroelectric power facilities from 1978 to 2014 and found that, on average, when regulators had a relatively high level of discretion, entrepreneurs received a license 22.5% sooner. We calculated hydropower ventures that use innovative run-of-the-river, pumped storage and marine technologies can generate up to US$7,740 per day in renewable energy – $2.8 million annually – from faster licensing.

Why it matters

Government regulation can pose a significant barrier for new ventures seeking to enter regulated markets, such as electric power, because they typically lack the resources and experience to meet requirements posed by regulations.

Chief Joseph Dam
A run-of-the-river hydroelectric plant, such as the Chief Joseph Dam in Washington, is a type of generator that uses little or no stored water. This type of plant is considered to have fewer environmental impacts than conventional hydro plants with large dams or reservoirs. U.S. Army Corps of Engineers

For large established companies, by contrast, operating in regulated markets can be beneficial because they have the resources and experience to overcome regulatory hurdles, while smaller competitors don’t. Large incumbents can also set the rules of the game in their favor by influencing lawmakers to create cumbersome legislation that makes it harder for new ventures to establish themselves.

Our findings suggest entrepreneurs using novel clean technologies should seek to enter jurisdictions where regulators have greater discretion from legislators who craft laws.

There are also important implications for policymakers. Instead of focusing on policy prescriptions, they should examine how those policies are actually implemented by regulators. The degree of regulatory discretion may be one of the reasons policies with good intentions fail to make a measurable difference.

How we did our work

We sought to discover the conditions under which clean-tech entrepreneurs were able to enter regulated markets in the absence of a formal policy change. To do this, we examined the role of the regulatory agencies that are responsible for implementing the laws created by legislators.

We looked specifically at regulatory discretion – the flexibility that agencies have to interpret and implement public policy – and its role in influencing market entry of new ventures. To measure discretion, we looked at the number of laws, known as administrative procedures acts, that limit the freedom of regulatory agencies to interpret and implement policies.

We found that when regulators have low discretion, their decision-making is directed by legislators, who are often lobbied by existing companies in efforts to prevent new ventures from entering their markets. However, when regulators have high discretion, they are more insulated from pressure from legislators and can make decisions based on their mission to serve the public interest.

An offshore wind turbine in Portugal.
Entering an emerging renewable energy market, such as offshore wind, requires substantial capital as well as understanding of many regulations. U.S. Department of Energy

What’s next

We are delving deeper into understanding how the implementation of policies can influence the development of new renewable energy technologies in the U.S. and globally. One of our projects explores the role of business stakeholders, such as environmental activists, in influencing regulators’ decision-making.

Our research suggests that activists may have a greater impact on entrepreneurial energy innovation when regulators have more discretion. Because discretion places more responsibility for regulatory decision-making on the regulatory agency than on legislators, it allows activists to influence regulators by challenging their legitimacy and reputation.

Future research should explore how variation in policy implementation affects the development of other emergent renewable energy technologies, such as wave and tidal power, biomass, biogas, hydrogen and geothermal. In regulated markets, although entrepreneurs may be able to develop feasible technologies, commercializing them is dependent upon regulators who can be influenced by established companies, legislators and stakeholder activists.

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