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Institutional – Stakeholder Perspective: Corporate
Governance in the Dutch Energy Sector
First Reader (Supervisor) Second Reader
Sara Giest Natasha van der Zwan
Zander Wevers Leiden University
MPA: Governing Markets: Competition and Regulation 13 January 2016
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Abstract:
The thesis is a case study of The Netherlands, with the aim to determine the role institutions and stakeholders play within the transition towards higher levels of renewable energy and lower levels of greenhouse gases in The Netherlands. Using institutional theory, incorporating rational choice and sociological institutionalism, I sought to determine how socio-technical regime actors influence and steer energy firms operating in The Netherlands towards higher levels of corporate social-, environmental- and economic responsibility. Similarly, I sought to understand how energy producers respond towards formal and informal rules from regime actors, namely their motives and their preferred environment for investment. I employed a qualitative research method, relying on interviews, policy analysis and policy advice from external actors within the research to understand the socio-political landscape in which energy firms operate.
Keywords: Corporate governance, Corporate responsibility, The Netherlands, Energy
Producers, Renewable energy, Socio-technical regime, Principal-Agent Theory, Institutional Isomorphism
Acknowledgement
I wish to thank the following individuals, without whom this research would not have been possible. Firstly, I wish to thank Gijs Droge, a mentor and former employer, for providing me with background information on the Dutch energy transition, and put me in contact with the interviewees. I would also like to thank the participants (see Annex 1) for taking the time to participate in the research, and their valuable input to the case study. Similarly, I wish to thank the staff of RVO for providing me with requested information in a timely manner. Lastly, I wish to thank my thesis supervisor, Sara Giest for being patient, diligent and resourceful throughout my thesis.
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TABLE OF CONTENTS
1 Introduction ... 8
2 Literature Review ... 10
2.1 Socio-technical regime as part of the Energy regime ... 11
2.2 Corporate Governance within the Energy Sector ... 14
2.3 Institutional-Stakeholder Perspective ... 15
Principal / Stakeholder - Agent Theory / Agency Theory ... 15
Institutional Isomorphism ... 17
2.4 Corporate Responsibility as a form of Corporate Governance ... 19
3 Research design ... 21 3.1 Variables ... 23 3.1.1 Independent Variables ... 24 3.1.2 Dependent Variable... 25 3.2 Data Collection ... 25 3.3 Case selection ... 26 3.4 Hypothesises ... 28
3.4.1 H1: Energy producers respond to high uncertainty, with low investment in RES. ... 28
3.4.2 H2: The institutional setting determines the motives of energy producers to invest in renewable energy sources ... 29
3.4.3 H3: Information asymmetry occurs due to the presence of competing rules within an energy regime. ... 30
4 European Union: Directives, Regulations & Market Mechanisms ... 30
4.1 The Netherlands in relation to EU directives ... 35
5 The Netherlands as a Case Study ... 40
5.1 Energy Producers ... 42
5.2 Policy Change, Agreements and Regulation ... 44
5.3 Change in policy making structure towards renewable energy ... 47
5.4 Socio-Political-, Technological- & Economic Uncertainty ... 51
5.4.1 Size Matters: ... 51
5.4.2 Social resistance towards green technologies: ... 52
6 Analysis... 55
6.1 Regulatory environment ... 56
4 Uncertainty ... 59 6.2 institutional environment ... 60 Coercive Isomorphism: ... 61 6.3 incentive structure ... 63 6.4 Main findings ... 64 7 Conclusion ... 65 8 Bibliography ... 68
9 Annex 1- interviewees, energy firms, role of interviewees... 72
10 Annex 2- Global reporting index for electricity utility sector ... 73
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“We do not inherit the earth from our ancestors, but we borrow it from our children…” Chief Seattle
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List of Abbreviations:
Abbreviation Description
ACM
Dutch Authority for Consumers and Markets
CER Corporate Environmental Responsibility
CG Corporate Governance
CR Corporate Responsibility
CSR Corporate Social Responsibility CTS Certificate Trading System
DNWB Delta Netwerkbedrijf (Network company)
ETS Emission Trading System
EU European Union
GDP Gross Domestic Product
IGO International Governmental Organisation
KWh Kilowatt-hour
MEP
Environmental Quality of Energy Production
NEA Dutch Emission Authority
NGO Non-Governmental Organisation
NIMBY Not-in-my-backyard
NL Netherlands
PA Principal-Agent Theory/ Agency Theory PBL Dutch Environmental Assessment Agency
RE Renewable Energy
RES Renewable Energy Sources
RVO Dutch Enterprise Agency
SDE
Stimulation of Sustainable Energy Production
SER Dutch Social Economic Council
TJ Terra Joule
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List of Tables and Figures:
Tables:
Table 1- Operationalisation of Dependent and Independent variables ... 23
Table 2- Results for Directive 2001/77/EC (Source: Eurostat, 2010) ... 32
Table 3- Directive 2009/28/EC Targets and Actual Figures (Eurostat, 2013) ... 35
Table 4- Indicative trajectories versus actual figures of share of energy from Renewable Energy Sources (Eurostat, 2015) ... 39
Table 5- Cabinets, Energy Agreements, Parties Involved, Policy Goals (Own illustration, 2015) ... 49
Figures: Figure 1- Triangle of Social Acceptance (Wustenhagen et. al. 2007) ... 13
Figure 2- Sources of institutional change which leads to higher levels of corporate governance (Doh & Guay, 2006) ... 18
Figure 3- RE production vs. RE certificates imported (CBS, 2014, p. 21) ... 37
Figure 4- Market share overview of RE producers in The Netherlands (Essent, 2012) ... 41
Figure 5- Energy Distributor Operators in The Netherlands (Energeia, 2011) ... 42
Figure 6- Sources of renewable energy production in The Netherlands (Essent, 2012 from Statistics Netherlands) ... 43
Figure 7- SDE Subsidy in relation to the Energy Price per Kilowatt hour (own illustration, 2015) ... 45
Figure 8- Declining tax base on the use of gas for electricity use (see Footnote 19, p 45) ... 46
Figure 9- Total production and expenditure towards renewable energy generation (RVO, 2014) ... 52
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1 INTRODUCTION
Since the Kyoto Protocol (UNFCCC, 1997), the European Union have developed a set of Directives with binding targets in relation to energy production and emission reduction, projecting country specific targets to its member states (Directive 2001/77/EC; 2009/28/EC). Within the directives, members of the European Union expressed specific motives, such as energy security; diversification of energy supply; and energy independence towards the
realisation of renewable energy (Directive 2001/77/EC). Directive 2003/54/EC focused towards market unification, increasing competition between energy sectors; and introduced European wide market mechanisms and regulation towards member states and their energy sectors (Huld & Bertoldi, 2003).
Since the introduction of EU Directives, The Netherlands, consisting of an energy intensive industry, have been lagging behind its counterparts in realising these targets (Eurostat, 2013). Communication from the European Commission raised concerns that countries such as France, the United Kingdom, Luxembourg, Malta and The Netherlands may not meet the targets by 2020, suggesting that these countries adjust their policies and regulations accordingly (Vaughan, 2014). While The Netherlands have met the targets set out in Directive 2001/77/EC, The
Netherlands ambitions towards meeting the targets of Directive 2009/28/EC have not been fruitful (IEA, 2014; Rabobank, 2012). While the Dutch energy transition have received a sufficient amount of academic attention and research focused predominantly on policy and regulatory tools (Verbong & Geels, 2007; Wolsink, 2000; Oteman et al. 2014) they yet have to determine the motives of energy producers within the transition towards renewable energy. The transition towards renewable energy, referred to as a socio-technical regime, is a social phenomenon, which requires active coordination between social-, market- and regulatory actors (Verbong & Geels, 2007; Smith et al. 2005). As a socio-technical regime rely on both institutions and stakeholders active within an energy regime, I sought to use Principal- Agent (PA) theory and Institutional Isomorphism to explain the relationship, whether formal or informal, between energy producers, institutions and stakeholders. Previous research on corporate governance within renewable energy have relied on PA theory, as PA theory explains the motives and methods in which stakeholders and energy producers engage in contracts (Hill & Jones, 1992; Verbong and Geels, 2006; Smith et al. 2005; Duran and Bajo, 2014; Babiak and Trendafilova,
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2010; Dogl and Behnam, 2014; Matten and Moon, 2008; Doh and Guay, 2006; Campbell, 2007). Institutional Isomorphism is another model for determining the relationship between utility providers and stakeholders, as institutions are made up of norms and values projected from stakeholders towards both regulatory and market institutions.
Research Question(s):
How have institutions and stakeholder influenced corporate governance within energy producers since the introduction of the EU climate and energy package, and how have energy producers responded to these influences?
Scientific and societal relevance:
The topic sustainability has received much scientific attention since the inception of the Kyoto Protocol (Dogl & Behnam, 2015; Smith et al. 2005; Doh and Guay, 2006, Verbong & Geels, 2007). Similarly, climate change, global warming and pollution due to energy intensive industries have mobilised both national and internation organisations to adapt policies and agreements as to reduce the impact of emission levels on the enviorment (Martinelli & Midttun, 2012). While a substantial part of research has focused on regulation and policies required to increase levels of renewable energy, only a handful of scholarly work have sought to understand the motives of energy firms in realising the targets sourced from policy goals (Dogl & Behnam, 2015; Wustenhagen et al. 2007).
With a third of The Netherlands being under the sea level, one might assume that The
Netherlands would be a leader in combatting climate change and global warming. However, The Netherlands performance under Directive 2009/28/EC projects a differentiated result (Eurostat, 2015). By increasing the level of renewable energy, and reducing the level of Greenhouse Gas Emissions, The Netherlands may be seen as a leader in combatting global warming.
As both regulatory institutions and energy firms are located within a socio-cultural setting
(Duran & Bajo, 2014), more emphasis should be given to the role social institutions, civil society and stakeholders play within the transition towards higher levels of renewable energy. These actors often play a substantial role in a socio-technical regime, as they take the form of the electorate to political actors, and consumers to energy producers.
10 Outline:
The following chapter will provide an introduction to the concepts and the theories concerned with understanding corporate governance, as well as the roles institutions and stakeholders play in a socio-technical regime. Chapter three elaborates on the research method, namely qualitative research such as interviews, policy papers and policy reviews from external parties, after which I will introduce the hypotheses tested within the analysis. Chapter four and five make up the case study, firstly elaborating on the role European Institutions play within the renewable energy, followed by an in depth case study of The Netherlands. Chapter four provides an overview of directives, regulation and market mechanisms used by the European Union to steer both states and industries towards meeting the targets set out in Directive 2001/77/EC and Directive
2009/28/EC. Chapter five provide an overview of The Netherlands in regards to the legal system, incentive structures, policies and agreements towards meeting targets set out in EU Directives. Chapter six is the analysis, connecting the literature review with the case study to key concepts and literature. The analysis will be followed with a conclusion, limitations, further research and policy advice.
2 LITERATURE REVIEW
Within the literature review, I will provide an introduction to the concepts related to corporate governance and corporate responsibility. Firstly, I will introduce corporate governance within the energy sector, relating to a socio-technical regime as a specific set of formal- and informal rules towards sustainable energy production (Smith et al. 2005; Verbong and Geels, 2006; Kern and Smith, 2008; Rip and Kemp, 1998).
I will introduce two theories, namely Principal- Agent theory (PA) and Institional Isomorphism, which have been used in previous scholarly work on sustainability in the energy sector (Dogl & Behnam, 2015; Smith et al. 2005; Doh and Guay, 2006). PA theory makes part of rational choice theory, providing a model for explaining a vertical relationship between two or more actors, namely the principal and the agent, later adapted towards Stakeholder- Agent theory (Hill & Jones, 1992). The second theory used within this thesis is institutional isomorphism, being part of sociological institutionalism, provides a model for explaining instituitonal change due to the
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creation of new rules; times of uncertainty; and the professionalisation of market-, social-, and regulatory instititons (DiMaggio and Powell, 1983).
2.1 SOCIO-TECHNICAL REGIME AS PART OF THE ENERGY REGIME
Verbong and Geels (2006) found that a socio-technical regime relies on active participation of regime actors, projecting formal or informal rules towards energy producers. Regime actors may be located outside the ideology, institutions, structures and instruments of the state (Smith et al, 2005). Matten and Moon (2008) define institutions not only as a formal organisation of
government, but as a set of norms, rules and behavioural expectations derived from stakeholders. The direction of the regime depends on regime membership and the distribution of resources for change (Smith et al. 2005). Smith et al. (2005) claims that “ the ability to make a difference, requires the exercise of political-, economic- and institutional power” (Smith et al. 2005, p. 1503). Regime actors can be defined as legislators, civil society, Non-Governmental Organisations, members of grass-root organisations, labour unions, trade associations,
consumers, and may include local or provincial governments (Verbong & Geels, 2007). Within a coordinated system, both regulatory and market intuitions rely on a network of actors, including civil society, for the creation, legitimization and enforcement of public policy (Smith et al. 2005). A socio-technical regime can further be defined as a linkage between particular elements necessary to fulfil societal functions such as the provision of energy (Kern and Smith, 2008). A socio-technical regime should rely on long-term, active participation of regime members to be effective (Verbong and Geels, 2006). In the absence of stable, long-term rules, firms would have little incentive to act corporately responsible (de Jong et al. 2005). Policy lock-in occurs due to external factors which are often outside the control of regime actors. An example of this is climate change (Kern and Smith, 2008) and security of energy supply (Verbong and Geels, 2006). Similarly, a positive vision of the future may play an active role in reaching long-term goals (Kern and Smith, 2008).
Verbong and Geels (2008) highlight three possible reasons for a change in a socio-technical regime, namely the landscape, new technologies and of niche markets. A landscape refers to the norms and values projected towards a particular policy area, yet may change due to external
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factors, for example, the price of energy inputs, global warming and climate change. As the landscape change, stakeholders may change their norms and values accordingly. For instance, during an oil crisis, large scale energy users may be incentivised to seek alternative energy sources (Rip & Kemp, 1998).
The second argument why regimes are likely to change is due to the creation or advancement of new technologies or niche markets. Innovations or technological advancements often start as market niches, developed over time which are able to compete effectively with dominant energy products in the energy regime (Kern & Smith, 2006). Stakeholders determine whether a
particular niche market competes with dominant markets, by providing legitimacy, support and financial investment during the development process, or on the contrary, by doing nothing at all (Babiak & Trendafilova, 2010). Regulatory actors may use tax exemption or subsidies to
stimulate particular niche markets or to create niche markets in a developed energy regime (Kern & Smith, 2006; Dogl & Behnam, 2015). Similarly, regulatory agents may increase taxes towards polluting actors, encouraging producers to adopt the environmentally responsible behaviour (Dögl & Behnam, 2015)
National governments cannot effectively implement climate policies without working closely with local governments, industry and civil society (Matten and Midttun, 2012). Regime actors rely on long-term policies and regulation for the realisation of climate goals (Smith et al. 2005; Verbong and Geels, 2006, Fabrizio, 2012), however, Wustenhagen et al (2007) finds that regime change may occur due to a shift in socio-political, community and market acceptance of green technologies (see Figure 1). Uncertainty may derive from four indicators, namely, technological- and socio-political- (Wustenhagen et al, 2007), regulatory (Fabrizio, 2012) and economic
uncertainty (Matten and Midttun, 2012).
Technological uncertainty is associated with the acceptance of new technologies, by either market- and community actors (Wustenhagen et al. 2007). Green energy technologies relate to low emission, as well as sustainable energy sources, while grey energy infrastructure relates to traditional energy sources such as coal, gas and oil inputs for energy production (see Directive 2001/77/EC and Directive 2009/28/EC). Social acceptance refers to the acceptance of new technologies by civil society, realised through an increased demand for green energy (Wolsink, 2000). On the contrary, social resistance refers not-in-my-backyard (NIMBY) grass root
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movements against energy technologies. Socio-political uncertainty may be linked to social acceptance, particularly as political actors are sensitive towards the views and demands of their electorate (Matten & Moon, 2008). Since the introduction of green technologies social resistance towards particularly wind farms and biomass, has gained prominence (Wustenhagen et al, 2012). However, social resistance for large scale infrastructure, such as high voltage energy grids, nuclear energy, urban planning etc. dates back much further (Wolsink, 2000). Regulatory uncertainty relates to unstable policies, which increases the risk of investment in new
technologies, particularly as energy producers fear that policy or regulatory change may reduce the value of energy assets (Fabrizio, 2012). Economic uncertainty relates to two aspects, namely internal and external economic drivers. Internal economic uncertainty refers to a firm’s ability to invest in renewable energy, or by tying the realisation of green technologies to a positive
business case. External economic drivers, such as the fiscal debt crisis of 2008 to 2012 may create market uncertainty, both from investors and senior management of energy firms (Martinelli & Midttun, 2012).
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2.2 CORPORATE GOVERNANCE WITHIN THE ENERGY SECTOR
The Corporate Governance concept employs both social and regulatory influences, namely formal-, cognitive- and normative rules (Verbong and Geels, 2007; Smith et al. 2005). Formal rules are defined as regulations and standards, resulting from the creation of policy or by changing existing policy (Verbong & Geels, 2007). Within a coordinated capitalist market, cognitive rules are formulated by interpreting the norms and values of a network of actors in a particular sector, framing problem agendas and agreed upon guiding principles (Prakash & Gugerty, 2010). Cognitive rules may derive from a change in landscape or from the agenda setting capacity of International Governmental Organisations (IGOs) such as the United Nations or the European Union (Smith et al. 2005, Verbong & Geels, 2007). Lastly, normative rules are derived directly from civil society, academics and professionals in a given sector (Verbong & Geels, 2007). Normative rules stem from a change in norms and values due to an increased presence of stakeholders, calling for a change in a particular regime (Babiak & Trendafilova, 2010). Stakeholders may influence market – and regulatory institutions, demanding that norms and values be translated into formal- or cognitive rules (Verbong & Geels, 2007; Duran & Bajo, 2014).
Since the Kyoto Protocol (1997), stakeholders have played a significant role in the transtion towards sustainable energy production and institutional change, resulting in a change in rules and norms transferred from society towards institutions (Verbong and Geels, 2008) and later, towards energy producers (Doh & Guay, 2006). Stakeholders are located either implicit or explicitly in the regime environment (Matten & Moon, 2008), and may be directly, or indirectly affected by the particular energy regime.
Verbong and Geels (2008) found that the liberalisation of previously state-owned utilities, as well as the Europeanization of regional energy agenda setting, led to a significant change in the Dutch energy regime. Liberalisation of the energy regime refers to the neo-liberal paradigm encouraging privatization or quasi-privatization of formerly state-owned utility enterprises. Liberalisation of former state-owned energy producers changed the relationship between the state and energy producers, namely, from being equity holders to becoming stakeholders in the case of privatization, and shareholders in the case that states held an interest in the firm (Verbong & Geels, 2007). Europeanization refers to the process through which nation states adopt the
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political and economic dynamics of the European Union in an attempt to synergise cultural, normative and ideological views into a set of regulations and directives toward particular policy areas (Verbong & Geels, 2007). Europeanization therefore changes the structure of authority and legitimacy, previously held by national institutions, towards collective bargaining and authority under the umbrella of regional co-decision making (Verbong & Geels, 2007). Both liberalisation and Europeanization redefines the structure and function of institutions operating in the national energy regime towards a monitoring and regulatory function (Verbong & Geels, 2007).
2.3 INSTITUTIONAL-STAKEHOLDER PERSPECTIVE
An institutional-stakeholder perspective has been used in previous research on corporate governance to explain the role institutions and stakeholders play in the development and implementation of corporate governance (Verbong and Geels, 2007; Smith et al. 2005; Duran and Bajo, 2014; Babiak and Trendafilova, 2010; Dogl and Behnam, 2014; Matten and Moon, 2008; Doh and Guay, 2006; Campbell, 2007). Matten and Moon (2008) found that an
institutional-stakeholder perspective is an ideal method for explaining the development of CR as “In CR, the motives of managers, shareholders and other key stakeholders shape the way in which corporations are governed (Matten and Moon, 2008, p.406)”. Campbell (2006) finds that stakeholder theory is closely linked to CR as it defines appropriate and inappropriate corporate behaviour based on the corporation’s actions in accordance with stakeholder norms and values. Combining Institutional- and Stakeholder theory, Matten and Moon (2008) found that PA theory allows these motives to be explored and compared within their inherent cultural and institutional context. Smith et al. (2005) finds that the role of agency theory is to provide active coordination between institutional goals and the goals of particular actors in a national energy regime.
Principal / Stakeholder - Agent Theory / Agency Theory
Agency theory has been used in scholarly research on corporate governance to understand the regulatory function induced by either market-, social- or regulatory institutions (Verbong and Geels, 2007; Smith et al. 2005; Duran and Bajo, 2014; Babiak and Trendafilova, 2010; Dogl and Behnam, 2014; Matten and Moon, 2008; Doh and Guay, 2006; Campbell, 2007). Agency theory refers to two or more actors, with individual goals, engaging in a contract as a means to reduce uncertainty. The agent refers to the direct management of a particular firm or institution as well as those individuals directly involved in the day to day operations of a firm or institution (Jensen
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& Meckling, 1976). The principal may take the form of stakeholders (Hill & Jones, 1992), shareholders or regulatory institutions (Jensen & Meckling, 1976). The Principal-Agent problem refers to information asymmetry between the principal and the agent, resulting in a welfare loss in the case where both parties were to benefit from the transaction (Jensen & Meckling, 1976). Agency cost can be defined as a cost which is incurred by both actors engaged in a contract, namely the cost incurred by the principal to monitor the agent, and the cost incurred by the agent to meet the goals of the principal, referred to as bonding cost (Hill & Jones, 1992).
The principal-agent problem arises due to the different roles and different goals of the principal and agent, particularly as both actors seek to maximise personal gain within a contract (Jensen & Meckling, 1976). In the case that the principal, as a regulatory institution, is unable to provide utilities such as energy, the principal would delegate the function towards market actors by incentivising agents to fulfil its responsibility (Doh & Guay, 2006). In order to ensure that the agent fulfils the principal’s goals, the principal will allocate incentives towards the agent, while developing systems to monitor the agent’s behaviour (Jensen & Meckling, 1976). As it would be costly for the principal to monitor the agent sufficiently, these structures or systems may not be adequate to avoid a welfare loss. In the case that the agency cost is too high, the agent will not be incentivised to act according to the goals of the principle, (Jensen & Meckling, 1976) but rely on a market structure, or market demands (Hill & Jones, 1992) for the realisation of the goals. In the case that the principal is a policy maker, regulator or shareholder, the principal will enforce formal rules on the agent (Jensen & Meckling, 1976). However, Fabrizio (2012) found that in the case that regulatory institutions change the regulatory framework constantly, energy firms, as the agent, would be less likely to accept the bonding cost associated with meeting the targets of the principal. Investments made by energy firms, namely bonding costs, to meet the goals of the principal, should be based on a long-term contract. In the case that regulation change, assets owned by energy producers may loose value, increasing the risk of investment (Fabrizio, 2012).
In the case that the principal is a stakeholder, the principal will enforce cognitive- or normative rules on the agent (Hill & Jones, 1992). These rules may require the agent to apply with
internationally approved systems such as transparency guidelines, codes of conducts and corporate governance guidelines such as the Global Reporting Index (see Annex 2). In the case
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that the agent relies on normative institutions for the legitimization of the firm or institution, consumers or civil society may play the role of the principal (Hill & Jones, 1992).
Institutional Isomorphism
Institutional isomorphism has been used to explain institutional-stakeholder influence towards energy policy as it shows how regulatory-, market - and social institutions can influence and change the working of institutions and energy producers in a particular market (Doh and Guay, 2006; DiMaggio and Powell, 1987). Stakeholders influence and often change the role and nature of institutions by collectively changing the norms and values towards a particular policy in a current regime (Dogl and Behnam, 2014; Doh and Guay, 2006; Matten and Moon, 2008; DiMaggio and Powell, 1983). Doh and Guay (2006) provides an overview of the transition towards higher levels of corporate governance based on institutional and stakeholder influence (see Figure 2). Firms often comply with stakeholder and institutional rules as the firm’s success depends on its conformity to the isomorphic influences of its institutional environment (Dögl & Behnam, 2015).
Institutional Isomorphism relates to three types of institutional changes, namely Coercive-, Mimetic- and Normative Isomorphism (DiMaggio and Powell, 1983). Each institutional change is related to a particular group of inter-related stakeholders. Coercive Isomorphism is derived from regulatory stakeholders, namely political or governmental actors (Matten & Moon, 2008), and may change due to a change in landscape or a change in political authority (Dogl and Behnam, 2014). Political authority may change in two ways, either by acquiring majority votes during elections, or by a consensus between two or more political parties within a multi-party system. Coercive Isomorphism rely on a re-definition of shared norms and values, which may be translated into regulations and incentives (Babiak & Trendafilova, 2010). Social institutions, such as NGOs and the media play an important role in capturing and projecting the social norms and values of civil society towards legislatives. Social institutions therefore play a significant role in coercive isomorphism as political parties may be sensitive towards social norms and values (Duran and Bajo, 2014; Wolsink, 2000; Wustenhagen et al, 2007). Within corporate governance, coercive rules developed by governments and legislative actors, seek to pressure firms to implement particular internal policies relating to corporate responsible behaviour (Dögl & Behnam, 2015). Regulatory stakeholders may seek to use informal rules, such as agreements,
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financial incentives (Jensen & Meckling, 1976), or subsidies or support programs (Amran and Haniffa, 2011) to stimulate a transition towards corporate responsible behaviour.
Figure 2- Sources of institutional change which leads to higher levels of corporate governance (Doh & Guay, 2006)
The second form of institutional isomorphism relates to a standard response to uncertainty from market stakeholders, namely consumers, competitors and suppliers (Dogl & Behnam, 2014; DiMaggio & Powell, 1983). These stakeholders often demand that institutions enforce
internationally approved standards, rules and norms which rely on cooperation and coordination amongst international institutions, governments, firms and civil societies as a means to reduce greenwashing by actors in the particular policy field (Duran and Bajo, 2014). Matten and Moon (2008) claims that markets, embedded in human societies, are created and maintained by a set of rules, norms and incentives through which institutions guide market actors and manage market outcomes. Dogl and Behnam (2014) found that the same norms, rules and incentives which guide institutions, applies to non-state actors in a particular policy field. In the case that there is strong competition or power play, between regime actors, the need for firms to satisfy stakeholder demands increases, as market stakeholders are able to choose from a wide variety of producers for their particular goods or services. The third and last form of institutional isomorphism is normative isomorphism, derived from the professionalization of social-, market- and regulatory institutions. External actors can be classified as environmental interest groups, NGOs, the media and trade associations (Dogl and Behnam, 2014), while internal actors are shareholders,
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Dogl and Behnam (2014) found that firms who conform to green stakeholder demands, show better financial results than those who do not. DiMaggio and Powell (1983) found that in the case that firms satisfy stakeholder demands, those stakeholders would be incentivised to reduce the probability of organisational failure. Normative- and Mimetic isomorphism may have some overlap in the sense that stakeholders within a particular institutional context are at the centre of economic validation of firms (Dogl & Behnam, 2014; Babiak & Trendafilova, 2010).
Consumers, competitors and trade associations often have a direct influence on whether a firm succeeds in a given market or whether a firm gets pushed out (Wahba, 2008). Professionalization of management and employees of a particular firm relates to normative isomorphism. DiMaggio and Powell (1983) refer to professionalization as the transfer of skills and competence of a particular ideology to a firm or institution.
2.4 CORPORATE RESPONSIBILITY AS A FORM OF CORPORATE GOVERNANCE The development of Corporate Responsibility (CR) builds on social-, economic- and
environmental principles (Duran and Bajo, 2014). CR may or may not result from stakeholder influence, but can be part of a particular firm’s internal strategy. Stakeholders have come to play a significant role in the transition towards renewable energy generation and carbon emission reduction as they influence energy firms through regulatory-, market- and social institutions (Dogl and Behnam, 2014; Babiak and Trendafilova, 2010; Matten and Moon, 2008; Kern and Smith, 2008). Dogl and Behnam (2014) found that there is a positive relationship between regulatory-, market - and social influences and the implementation of CR practices in both developed and developing countries, noting that market influences are stronger in developed countries. Dogl and Behnam (2015) further note that firms use CR as part of a corporate strategy to obtain social and political capital, or in response to increasing demands for green technologies. Social and political capital refers to the market principle of good will, that firms would engage in CR as a means to increase their social and political value and legitimacy. Babik and Trendafilova (2010) found that CR is a causal driver of environmental management, derived from the motives or pressures from either social-, economic- or political actors. In other words, CR is the ability of a firm to meet the demands of social-, market- and political actors whom encourgage
corporations in the particular energy regime to go beyond formal rules, but to include normative rules projected by stakeholders in their CR policy (Verbong & Geels, 2007; Smith et al. 2005).
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Previous scholarly work distinguishes between two managerial motives for engaging in CR activities, namely implicit and explicit CR (Matten and Moon, 2008; Smith et al. 2005). Explicit CR refers to corporate policies that assume and articulate responsibility for societal interests (Matten & Moon, 2008). These policies are often voluntary programs and strategies that combine social and market values, or may relate to agreements between the principal and the agent (Hill & Jones, 1992). Implicit CR refers to the role corporation holds within formal- and informal institutions, driven by the interests and concerns of civil society (Matten & Moon, 2008). Implicit CR consists of a set of values, norms and rules projected by stakeholders onto a
particular firm or industry, defining proper behaviour of corporate actors in collective rather than individual terms (Matten and Moon, 2008).
Matten and Moon (2008) list five distinctions within an institutional context from which we can distinguish different CR policies of firms. The first is the political system, or landscape (Verbong & Geels, 2007), towards social commodities, such as energy. The second distinction is the financial system, corporations operating in Europe are often embedded in a small network of large investors. Firms are therefore limited to a small group of finance or investment providers. Financial institutions may enforce a set of rules to which the borrower needs to apply prior to obtaining a loan. The third institutional context is the nature of the firm. By the nature of the firm, Matten and Moon (2008) refers to the key structural features of a firm, namely, the firms ability to respond within a short period to changing and differentiated demands from
stakeholders. This is a particular vital point towards energy producers in The Netherlands, as change often implies substantial investment due to the cost associated with new energy plants and the life span of each energy plant (Rip & Kemp, 1998). Coal plants have a life cycle of about 30 years, which may slow down change as firms seek a return on investment prior to investing in alternative sources of energy production (Fabrizio, 2012). The fourth institutional context is the organisation of market procedures, relating to the direct relations between market actors in the given regime, whether it is consumers, trade associations, regulatory agencies or competing firms. The final institutional context is the coordination and control systems. The control system refers to the legal platform within which the firm operates, i.e. regulation, incentives and type of rules which are in place within a given regime.
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Corporate strategies are affected by the particular roles and responsibilities of states, markets and civil society. As the legal-, political-, economic- and social structures vary, so will the structural influence on CR vary (Duran and Bajo, 2014; Babiak and Trendafilova, 2010). Babiak and Trendafilova (2010) argues that CR policy legitimize firms in the sense that stakeholders perceive firms who engage in CR policy as more valuable, meaningful, predictable and trustworthy. Campbell (2007) and de Jong et al. (2004) found that in the case that these institutions are not present, or in the case that institutions do not enforce rules, norms and
incentives on firms, these firms would have little incentive to behave corporately responsible (de Jong et al. 2005). Similary, Galaskiewichz and Burt (1991) argues that firms tend to act in a responsible way if normative or social institutions are in place, when there is a proper set of incentives for such behaviour. Wahba (2008) argues that when stakeholders view firms as being responsible, the financial performance of institutional investment towards a specific firm or institution will increase, yet only in the case that the level of corporate responsibility was high, compared to low.
Both Agency – and Institutional Isomorphism theory relate to corporate governance and corporate responsible behaviour, particularly as instititons change, so will the relationship between institions and energy producers change. Stakeholders may influence one another, in the case of institutional isomorphism, while the same stakeholders may be present at multiple levels, such as NGOs, civil society, environmental groups and trade associations (Duran & Bajo, 2014). While corporate governance asks the question ‘why?’, corporate responsible behaviour asks the question ‘how?’. That said, it would be nearly impossible to look at corporate governance without including corporate responsible components, as corporate responsibility is a core function of corporate governance (Dögl & Behnam, 2015).
3 RESEARCH DESIGN
Based on the literature review, I have developed a set of independent variables, namely,
institutional setting, political stability, economic affluence and social acceptance as to determine institutional-stakeholder influence on corporate governance of energy producers (see Table 2). Previous scholarly work on corporate governance and corporate responsible behaviour relied on multiple research methods, while interviews or questionnaires were the most prominent in
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corporate governance (Verbong and Geels, 2006; Smith et al. 2005; Duran and Bajo, 2014; Babiak and Trendafilova, 2010; Dogl and Behnam, 2014; Doh and Guay, 2006; Campbell, 2007). Interviews and questionnaires were preferred in scholarly work as energy producers and institutions are embedded in socio-cultural setting, making it difficult to accurately compare firms by means of quantitative research methods (Duran & Bajo, 2014).
For my qualitative research, I have relied on interviews, policy reviews and corporate documents, namely annual statements of energy producers, for my data collection. For the quantitative element of the thesis, I have relied on existing data to test whether policy tools, for example, regulations, subsidies and public spending had a direct effect on the gross share of energy production from RES, or carbon emission reduction within The Netherlands. This particularly relate to the research question, how do stakeholders and institutions influence the level of corporate governance of energy producers, while simultaneously testing whether, and how, energy producers respond to influence from stakeholders and institutions in The
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Table 1- Operationalisation of Dependent and Independent variables
CONCEPT DEFINITION INDICATOR SOURCE
INDEPENDENT VARIABLES Institutional Setting The role and function
of regulatory-, market- and social institutions.
Influence by means of formal or informal rules, Voluntary and regulatory rules, European Directives Energy reports, Government – and stakeholder websites, Policy reviews. European Commission. Political Support Local and national
political support towards renewable energy generation and carbon emission reduction.
RES subsidies, RES specific data, budget allocation.
Policy papers, policy reports. RVO, Statistics Netherlands,
International Energy Agency.
Economic Affluence Ability to invest in energy from RES.
Corporate budget, Government Budget for Subsidies Annual statements of energy producers, RVO, CBS Social Acceptance Level of acceptability
towards green technologies from civil society.
Demand for RES, level of resistance to RES projects Policy reports, interviews, Policy reports DEPENDENT VARIABLE Corporate Governance Corporate responsible (CR) behaviour: social-, environmental- and economic responsibility. Energy produced from RES, aggregate carbon emission reduction, Motives and limitations for engaging in RES production Interviews, Annual statements (2006-2013), Statistics Netherlands, Netherlands Enterprise Agency (RVO), Eurostat 3.1 VARIABLES
The aim of the thesis is to determine, whether, and how institutions and stakeholders influence the level of corporate governance of energy producers in The Netherlands. Within Table 2, I indicated the dependent, corporate governance of energy producers, and the four independent variables for the analysis. With these variables I will test whether a change in institutional
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setting, political support, economic affluence, or social acceptance would result in a change in corporate governance of energy producers.
3.1.1 Independent Variables
I listed four independent variables, namely, institutional setting, political support, economic affluence and social acceptance.
Institutional setting refers to the role and function of institutions. By institutions the thesis refers to regulatory-, market- and social institutions rather than classical institutions i.e. legislative and ministerial.
Political support refers to formal rules and incentives allocated towards energy producers with the aim to increase the level of renewable energy generation. Formal rules refer to policy goals and regulation, while incentives refer to subsidies and energy investment tax breaks1 (Oteman et al, 2014).
Economic affluence refers to the financial health of energy producers. Testing the economic affluence was performed for two reasons e.g., the first being the economic crisis of 2008- 2012, during which the financial and sovereign debt crisis played a significant role in green innovation and industrial engagement towards the realisation of Directive 2009/28/EC (Martinelli and Midttun, 2012). The economic crisis may have had an impact on investments made towards renewable energy generation due to the high level of uncertainty associated with the debt crisis. The second reason is due to access of financial resources, whether by means of private funding, public funding or the ability of individuals, being firms or households, to obtain energy sourced from RES for personal use.
Lastly, social acceptance of renewable energy generation refers to the acceptance of green technologies and an increase in demand for renewable energy (Wolsink, 2000; Wustenhagen et al, 2007). On the contrary, social resistance towards green technologies may influence how energy producers respond towards demands for renewable energy. The second point specifically refers to the presence of not-in-my-back-yard (NIMBY) groups.
1 Dutch policy Energie Investerings Aftrek (EIA) allows energy producers and individuals claim back the tax paid on
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3.1.2 Dependent Variable
Within the introduction and literature review, I defined corporate governance of energy
producers by means of two indicators, namely, renewable energy generation and carbon emission reduction. For my definition of renewable energy, I relied on the European Commission’s
definition of renewable energy sources (RES) within Directive 2001/77/EC and Directive
2009/28/EC. Within both Directives, RES was defined as energy sourced from either wind, solar, geothermal, wave, tidal, hydro, biomass, landfill gas, sewage treatment gas and biogas sources. Carbon emission reduction refers to a reduction in carbon emission during energy production noted in Directive 2003/54/EC on the Emission Trading System (ETS).
From the literature review, I found that independent variables, such as the institutional setting, political support, economic affluence and social acceptance towards green technologies are key determinants towards the success of a socio-technical regime. Whether the motives of energy producers are implicit or explicit, managers of energy firms are particularly sensitive towards their environment, and would be more likely to adapt internal or external policies when there is an incentive to do so. Incentives may vary and be tangible or intangible.
3.2 DATA COLLECTION
In order to answer the research question, I relied on both primary and secondary data sources. In regards to primary data, I conducted interviews with representatives from six of the seven largest renewable energy producers in The Netherlands (see Figure 1), namely, Delta, Electrabel, E.On, Essent, Eneco, Greenchoice2 and Nuon. Having received a positive response from
representatives of six of the seven firms, I scheduled interviews with senior stakeholder – and government relations personnel. Stakeholder and government relation personnel play a key role in the governance of a firm as they serve as a communication platform between the firm and its stakeholders. Firm representatives meet with stakeholders, namely, regulatory agents, interest groups and community representatives, and other members active within the energy regime (see Annex 3). Interviews lasted about forty minutes to an hour and were scheduled at the
2 Greenchoice declined the invitation for an interview and noted that they do not have annual statements or
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convenience of the interviewee. Three of the interviews were held on a one on one basis, the other interviews had more than one interviewee present.
The interviews had quasi-structured format, namely, standard questions, questions in response to answers given by the interviewee, and questions in relation to the annual statement of the
particular energy producer. As interviews were held in late 2015, and the area research spanned from 2006 to 2013, interviews were compared and related with firm specific annual statements and/or the corporate responsibility reports during given period. Within the annual statements, I particularly sought data on stakeholder- and government relations, policy changes and responses to the political climate.
For both qualitative and quantitative data, I relied on policy reports at a national, European and international level for data collection. These sources included reports from the International Energy Agency, European Commission for Energy, Dutch research institutions and the Dutch court of auditors.
For the quantitative analysis, I relied on statistics and data sets from European, international and national bodies. National statistics were collected from the Statistics Netherlands3 (CBS) and The Netherlands Enterprise Agency4 (RVO). For data sets concerning the Euro 15, I relied on statistics and data from the European statistics bank (Eurostat5). For energy policy specific statistics, data and policy reviews, I relied on Netherland specific policy reports from the International Energy Agency (IEA) as well as national policy overviews.
3.3 CASE SELECTION
I have selected The Netherlands as a case, as The Netherlands have been known to have a coordinated policy making system, relying on a larger scope of interest groups for its policy making process. A coordinated system is commonly found in western Europe, however, The Netherlands lags behind its counterparts in the realisation of large scale renewable energy production (see Table 4). The position of The Netherlands therefore makes an interesting case as
3 http://www.cbs.nl/en-GB/menu/home/default.htm?Languageswitch=on 4 http://english.rvo.nl/
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it may indicate that widening the scope of regime actors does not imply that the regime direction would lead to higher levels of corporate governance.
Within the thesis, I relied on data from the years 2006 to 2013 for both a qualitative and
quantitative analysis. While the research was conducted late 2015, and information used spanned from the year 2006 to 2013. The focus of the thesis is to determine whether there is a variance in institutional-stakeholder influence towards energy producers over the period 2006 to 2013. The period was selected as it was prior and post the introduction of the Renewable Energy Roadmap (2007) and the European Climate and Energy Package (2009), namely, Directive 2009/28/EC. The research will analyse institutional-stakeholder influence towards six of the seven largest energy producers (Figure 1) from RES in The Netherlands. Energy producers include Delta, Electrabel, Eneco, Essent, E.On and Nuon, collectively owning around 80% of the Dutch energy market (Huffen and Koppenjan, 2015). Within the analysis, I sought to generalise the findings to all energy producers engaging in energy production from RES in The Netherlands. Energy producers, relying on RES for energy input, share similar stakeholder and institutional
influences, namely policy and regulation; incentives, such as subsidies and tax deductions; and social acceptance towards green technologies.
Generalisation can further be made towards energy producers relying on RES for energy production in other European countries, as most European members comprise of intensive industries, share targets and similar European Directives and Regulations. However,
generalisation may be limited due to different institutional and stakeholder influences, such as National policies and regulations; access to RES and levels of social acceptance of RES technologies. In regards to social acceptance, stronger generalisation can be made to smaller countries, as civil society in smaller countries i.e. geographically, are more sensitive towards land use than countries with larger territories (PBL, 2014).
The thesis will employ a quantitative analysis based on statistics and data of The Netherlands as a whole, therefore gross energy produced for consumption from RES (N) rather than the sample (n). This is particularly due to the numerous factors. Firstly, the availability of firm specific data was either not available, was confidential or not clearly defined. Due to the international
orientation of energy producers in the sample (n), firm specific data were not comparable due to energy producers projecting information on operational output rather than country specific
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output. This means that energy producers may project, in their annual statements, information which may or may not include operations held in neighbouring countries. The second reason is due to the presence of joint ventures between energy producers, or use of green certificates for renewable energy sales. For these reasons, it was not able to project firm specific information on energy produced from RES, but rather to rely on national statistics compiled by RVO and CBS. The limitation may have been solved by means of comparing renewable energy capacity (MWh) rather than renewable energy production (GWh) in the case that energy producers were active in The Netherlands alone and did not rely on green certificates for supply of green energy.
Projecting firm specific data would therefore have decreased the reliability and validity of the thesis.
By using data on the population (N), rather than the sample (n), I would be able to make a more valid analysis as institutional and stakeholder influences do not drastically change within a cultural society. This means that formal and informal rules derived from stakeholders and institutions, projected towards one energy producer, may be projected to all energy producers.
3.4 Hypothesises
Based on the literature review, I will use the following hypothesis to test how stakeholders and institutions influence the level of corporate governance of energy producers, and how energy producers respond towards influence from stakeholders and institutions.
3.4.1 H1: Energy producers respond to high uncertainty, with low investment in RES.
Based on the literature, uncertainty may derive from regulatory- (Fabrizio, 2012), economic- (Martinelli & Midttun, 2012), socio-political and technological factors (Wustenhagen et al. 2007). Fabrizio (2012) claim that regulatory instability undermines the effectiveness of regulatory initiatives, increasing the risk of investment in new energy assets. Policy towards green technologies should be seen as a contract between regulatory actors and energy producers, long-term orientated, with clear goals and incentives. Similarly, Fabrizio (2012) finds that regulatory change may devalue existing assets, reducing the incentive of energy producers to take on bonding costs.
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Socio-political-, economic- and technological uncertainty is predominantly derived from market- and social actors. Wustenhagen et al. (2008) found that the presence of NIMBY groups reduces the incentive for investing in renewable energy. Civil society tend to free-ride on the notion of renewable energy, demanding higher levels of green energy, while resisting green technologies in their direct environment. Technological uncertainty relates to market acceptance of green technologies. Particularly as green technologies have a lower capacity compared to traditional energy sources, and therefore have a lower investment-profit ratio (Wustenhagen et al. 2008). As green technologies form part of a niche market, often requiring extensive research and
development prior to competing with traditional energy sources (Verbong & Geels, 2007). Economic uncertainty relates to two aspects, namely internal and external economic drivers. Internal economic uncertainty refers to a firm’s ability to invest in renewable energy, or by tying the realisation of green technologies to a positive business case. External economic drivers, such as the fiscal debt crisis of 2008 to 2012 may create market uncertainty, both from investors and senior management of energy firms (Martinelli & Midttun, 2012).
3.4.2 H2: The institutional setting determines the motives of energy producers to invest in renewable energy sources
The institutional setting is a determining factor of corporate responsible strategies of firms (Campbell, 2007; Babiak and Trendafilova, 2010). An institutional setting relies on economic and legal drivers, cultural differences (Duran and Bajo, 2014), investment (Smith et al. 2005), and financial systems (Matten and Moon, 2008) as determining factors for the realisation of green energy technologies.
The institutional setting may determine the motives of energy producers for engaging in corporate responsible behaviour, for example, implicit or explicit corporate responsibility (Matten and Moon, 2008). Explicit CR policies are linked towards voluntary programs and corporate strategies towards meeting the environmental-, social- or economic interests of
stakeholders, while implicit corporate responsibility indicates how firms respond to rules, values and norms projected by stakeholders (Matten and Moon, 2008). Explicit corporate responsibility is voluntary or market institution driven, focusing on activities that express special industry
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competencies (Babiak and Trendafilova, 2010), while implicit CR is of a mandatory and customary nature (Matten and Moon, 2008).
3.4.3 H3: Information asymmetry occurs due to the presence of competing rules within an energy regime.
Agency theory provides a model for active coordination between the goals of institutions and that of actors in a particular energy regime (Hill & Jones, 1992). Regime actors vary in power and resources, whether it is economic-, market- or political, and may seek to influence
competing actors within a particular policy area or regime (Verbong & Geels, 2007). Agency theory provides a model of information asymmetry between the principal and agent (Jensen & Meckling, 1976) or the stakeholder and the agent (Hill & Jones, 1992). However, in the case that there is more than one principal in the transaction, or in the case that the agent finds that it is not able to meet the objectives of the principal, the agent may choose not to comply with the goals of some or all of the principals (Hill & Jones, 1992). The principal-agent problem can occur within multiple scenarios and would rely on differentiated rules, namely, formal-,
cognitive- and normative rules (Verbong and Geels, 2006).
Firms may comply with stakeholder and institutional rules as the firm’s success depends on its conformity to the isomorphic influences of the institutional environment (Dogl and Behnam, 2014). Dogl and Behnam (2014) found that that the same norms, rules and incentives which guide institutions, applies to non-state actors in a particular policy field. In the case that there is a strong competition between regime actors, the need for firms to satisfy stakeholder demands increase, as social- and market stakeholders, are able to choose from a wide variety of producers for their particular goods or service (Dogl and Behnam, 2014).
4 EUROPEAN UNION:DIRECTIVES,REGULATIONS &MARKET MECHANISMS
The Kyoto Protocol (1997) was the first global consensus on the realisation of sustainable energy as a means to reduce climate change (UNFCCC, 1997). The European Union signed the Kyoto Protocol on behalf of the Euro 15 members breaking down and dividing the European target to
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its member states, translated into Directive 2001/77/EC (see Table 2). The Directive was the first European Directive towards renewable energy production, establishing a clear roadmap towards achieving 12% renewable energy consumption by 2010. Within Directive 2001/77/EC, the European Commission projected additional motives for increasing sustainable energy
production, namely security and diversification of energy supply, environmental protection and social and economic cohesion (Directive 2009/28/EC). Europe, consisting of an energy intensive industry, relied mostly on the import of fossil fuels such as oil, coal and gas for its energy
supply, and is therefore sensitive towards the price of energy imports.
Within Directive 2001/77/EC, each Member State received a binding target, based on its energy intensity and gross domestic product, which contribute to a collective renewable energy
consumption of 12% by 2010. Member states had to submit a clear roadmap to meeting these targets, while updating the European Commission bi-annually by means of a progress report. Directive 2001/77/EC was to be the first Directive towards sustainable energy production of many more to come. Since the new millennium, Europe has taken major steps towards expanding and integrating energy sectors within the European community. Directive 2003/54/EC on the common rules for the internal market in energy, was yet another big shift within energy policy and encouraged Member States to liberalise and Europeanise its energy market (Verbong & Geels, 2007). Energy utilities were predominantly in the hands of public authorities, which had to be sold or privatised to increase efficiency of the energy market and stimulate competition between energy producers. Directive 2003/54/EC stipulated that the construction of new energy capacities must follow a tender procedure, which the EC and the European Parliament found would not realise in the case that states had an interest in energy utility providers.
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Table 2- Results for Directive 2001/77/EC (Source: Eurostat, 2010)
Euro 15 Members (%) RES in 1997 T* (%) 2010 A** (%) 2008 Difference Belgium 1.1 6 5.3 -0.7 Denmark 8.7 29 28.7 -0.3 Germany 4.5 12.5 15.4 2.9 Greece 8.6 20.1 7.6 -12.5 Spain 19.9 29.4 20.6 -8.8 France 15 21 14.4 -6.6 Ireland 3.6 13.2 11.7 -1.5 Italy 16 25 16.6 -8.4 Luxembourg 2.1 5.7 4.1 -1.6 Netherlands 3.5 9 8.9 -0.1 Austria 70 78.1 62 -16.1 Portugal 38.5 39 26.9 -12.1 Finland 24.7 31.5 31 -0.5 Sweden 49.1 60 55.5 -4.5 United Kingdom 1.7 10 5.6 -4.4
Notes: * target in % of renewable energy consumed ** actual % energy consumed from renewable sources RES: Renewable Energy Sources consumed
The unbundling of the energy supply chain was yet another form of liberalisation within Directive 2003/54/EC. The directive encouraged member states to break down existing energy markets to the extent that member states where able to safeguard independence of energy supply. Unbundling referred to the separation of energy producers, transmission and distribution of operators into separate entities. The liberalisation of transmission operators was to safeguard energy systems meeting renewable demands in an adequate, responsible and transparent way. By separating transmission operators from energy providers, the European Council and European Parliament’s goal was to ensure non-discrimination between competing system users, namely energy producers. The role of distribution operators is to maintain and secure reliable and
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efficient electricity security with due regards for the environment. Lastly, distribution operators were encouraged to give priority to production from RES or waste burning for heat and
electricity supplied to households and businesses (Directive 2003/54/EC).
Market Mechanisms:
Directive 2003/54/EC introduced two market mechanisms referred to as the Emission Trading System (ETS) and the Certificate Trading System (CTS). The ETS issued emission ceilings to high emission sectors, such as heavy manufacturing and traditional energy producers, while creating a market trading platform for the sale of emission rights between actors. The objective was to stimulate energy efficiency through technical innovation within production by means of an emission ceiling. Energy intensive sectors received an emission cap, after which firms were obligated to buy additional emission rights from lower emitting sectors in the case that the emission cap has been exceeded. The ETS was therefore created to steer high emission sectors to reduce emission levels, while incentivising low emission sectors and firms via an emission trading platform. The second market mechanism was directed toward the production of renewable energy, which facilitated the trade of green certificates between sectors and firms located within EU economic community. The CTS relied on a similar market mechanism as the ETS, however, it relied on voluntary participation rather than compulsory emission levels. The CTS allowed energy producers to buy green certificates from foreign producers, and to sell these certificates as green energy to their consumers.
Both market mechanisms raise questions in regards to the motives of the particular Directives, namely, security and diversification of energy supply; environmental protection; social- and economic cohesion. Both the ETS and CTS may benefit energy producers in a particular market where there is a vast amount of RES, while raising the cost of production towards markets with little access to RES. Energy producers in markets with a substantial amount of access to RES, have to invest less capital in order to yield high levels of renewable energy production. On the other hand, energy producers with little access to RES would have to invest large amount of capital to either reduce emission levels, or buy emission rights form energy producers with lower emission.
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Adaptation to incorporate limitations:
Directive 2009/28/EC was a direct response to the Renewable Energy Roadmap of the European Commission (2007). Directive 2009/28/EC, known as the 20-20-20 Directive, built on, and replaced Directive 2001/77/EC while incorporating aspects of Directive 2003/54/EC. While motives towards renewable energy generation remained the same, some changes were made to incorporate limitations from previous Directives. National targets of Directive 2001/77/EC were comparable to energy consumption levels from 1997, Directive 2009/28/EC projected new targets based on levels from 2005. The Directive focused on a collective gross production of 20% RES in Europe as a whole rather than 12% RES consumption. Other than RES production, Directive 2009/28/EC expanded the scope of national targets from purely RES consumption, to reducing emission levels for Non-ETS sectors by 20% and decreasing emission levels within transport by 10% (See Table 3). Non-ETS sectors included specific sectors which were not included in Directive 2003/54/EC, namely, households, transport, governments (local and provincial), services and non-heavy industrial manufacturing.
In order to meet targets, set out in Directive 2009/28/EC, national governments were encouraged to increase public support for RES production; prioritise grid access for energy from RES in the internal market; expand cross border grid lines to stimulate import and export of energy; and adapt energy prices to include the environmental-, social- and healthcare cost (Directive 2009/28/EC, 2009).
These guidelines were to solve the limitations of the ETS and Certificate trading system. Particularly, as green certificates do not produce a guarantee of RES energy in a particular market, but only a share of energy in a particular grid. RES energy therefore cannot be
transferred from one country to another, as energy from RES share the energy grid with energy produced from fossil fuels. Energy producers with limited access to RES, finding it more cost effective to buy green certificates rather than producing energy from RES itself, would be incentivised to do so. It is therefore that Directive 2009/28/EC encouraged member states to adapt energy prices to include externalities of energy production, as to increase incentives towards energy production from RES. The energy prices should therefore reflect the energy produced, rather than the energy consumed in the particular market.
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Table 3- Directive 2009/28/EC Targets and Actual Figures (Eurostat, 2013)
Euro 15 Members (%) RES in
2005 T* RES (%) 2020 A** RES (%) 2013 Difference in RES (%) Belgium 2.2 13 7.9 -5.1 Denmark 17 30 27.2 -2.8 Germany 5.8 18 12.4 -5.6 Greece 6.9 18 15 -3 Spain 8.7 20 15.4 -4.6 France 10.3 23 14.2 -8.8 Ireland 3.1 16 7.8 -8.2 Italy 5.2 17 16.7 -0.3 Luxembourg 0.9 11 3.6 -7.4 Netherlands 2.4 14 4.5 -9.5 Austria 23.3 34 32.6 -1.4 Portugal 20.5 31 25.7 -5.3 Finland 28.5 38 36.8 -1.2 Sweden 39.8 49 52.1 3.1 United Kingdom 1.3 15 5.1 -9.9
Notes: * target in % of renewable energy produced ** actual % energy produced from renewable sources RES: Energy Produced from Renewable Sources
4.1 THE NETHERLANDS IN RELATION TO EU DIRECTIVES
While The Netherlands have achieved its target of 9% energy consumed under Directive
2001/77/EC, it has been lagging behind its counterparts under Directive 2009/28/EC. This means that while The Netherlands consume a substantial amount of renewable energy, renewable energy is imported rather than produced locally. In comparing data from Table 2, gross
consumption of RES, and Table 3, gross production from RES of The Netherlands we can make two observations. Either The Netherlands consumes much more energy from RES than it
produces, or, The Netherlands have increased its energy consumption substantially between the years 1990 to 2005.
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Within Directive 2009/28/EC The Netherlands agreed a set of binding targets to be realised by the year 2020, comparing to energy production levels of the year 2005. These targets include 14% renewable energy in gross energy production, 20% aggregate carbon emission reduction from non-ETS sectors, and 10% emission reduction in transport.
Table 3 indicates that The Netherlands has been lagging behind other EU member states in regard to aggregate energy produced form RES, mainly due to limited access to land and natural RES such as hydropower (PBL, 2014). Table 3 places The Netherlands as second lowest
producer of energy from RES, after Luxembourg (Eurostat, 2013). Similarly, assessing the distance between the 2020 target and the level of RES production in the 2013, The Netherlands is the second furthest, after the UK, from realising its target (Eurostat, 2013).
With the percentage energy produced from RES at 4.5% (see Table 3, 4), one can assume that The Netherlands will not meet its target of 14% by the year 2020 (Vaughan, 2014). The Netherlands percentage of RES has been predominantly stagnant, with a low increase on an annual basis (see Table 4). Between the years 2009 to 2010, the percentage of energy from RES decreased from 4.1% to 3.7% largely due to a decrease in renewable energy demanded as a result of the economic downturn, and unfavourable weather conditions for the realisation of renewable energy (CBS, 20106).
Energy producers in The Netherlands rely on green certificates rather than the production of renewable energy as means to meet increasing demands for energy from RES (see Figure 3). RES production in The Netherlands is generated on a small scale, namely less than 100
Megawatt hour capacity (Oteman et al. 2014). The Netherlands currently have 500 small scale energy producers through civil cooperatives, local government initiatives and joint ventures between energy producers and private firms (Oteman et al. 2014). A list of the initiatives can be found on Hieropgewekt7. Households and small to medium sized enterprises relied on
decentralized energy production from RES for personal use (Huffen and Koppenjan, 2015). Small scale energy production remained a niche market within the energy sector, yet it gained
6 http://www.cbs.nl/NR/rdonlyres/BED23760-23C0-47D0-8A2A-224402F055F3/0/2012c90pub.pdf 7 List of 500 small scale energy users, accessed 10 November 2015/ http://www.hieropgewekt.nl/
