Governance of innovation: the case of advanced metering

Abstract

Major innovations in the electricity system are necessary to prepare for the coming transition to new forms of mobility and electricity generation. One step in this direction is the implementation of advanced metering infrastructures (AMI). The organization of this process is in many cases, like the EU, influenced by the liberalization and subsequent unbundling of the electricity industry. This research sets out to uncover how the organization of an innovation like advanced metering infrastructures differs between an unbundled and vertically integrated industry. Transaction cost economics (TCE) argues that policy makers in competitive environments adopt organizational forms that align with the attributes of the transaction they support. It is argued that unbundling influences this process because it forces certain organizational forms on an industry. The standard transaction cost framework is extended in this study to take the innovative nature of this development into account. To this end the transaction attributes of product complexity, systemic nature and appropriability regime have been added to the TCE framework. A comparative case study between the Swiss vertically integrated and Dutch unbundled electricity industries was conducted and in each case, five smart metering projects were studied. The transactions, modes of governance and innovative performance were identified in each subcase. The difference between the two case studies showed that firms in unbundled industries found ways to avoid the limitations imposed by unbundling. In the unbundled sector it was found that applying a regulatory mode of governance or lowering asset specificity, are ways of circumventing the limitations posed by unbundling. The regulatory mode of governance was found to address the need for more coordination in the development process due to the systemic nature of the innovation and to lower the behavioral uncertainty of the transactions. However, the comparison has also shown that certain transactions are being avoided in the unbundled industry which limits innovative performance. The results of this research can be used to get a better insight into the role of innovation in transaction cost theory.