Can we keep the lights on? Investment, regulation & sustainability in the UK electricity industry.

378 Pages·2013·2.47 MB·English

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UNIVERSITY OF SOUTHAMPTON
FACULTY OF BUSINESS AND LAW

Can we keep the lights on? Investment,
regulation & sustainability in the UK
electricity industry.

by

Elizabeth Ann Warren

Thesis for the degree of Doctor of Philosophy

May 2013
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Abstract

The United Kingdom (UK) electricity generation industry is shrouded in uncertainty,
particularly as a consequence of new environmental regulations. Using a longitudinal case
study, this thesis analyses how, following the introduction of the Large Combustion Plant
Directive – LCPD, the industry used investment appraisal techniques to strategically mobilise
power and effect change to UK policy.

Through the use of interpretive research and drawing on the ontological framework of
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structuration, this thesis will interpret how actors used the rules and resources associated
with investment appraisal techniques to manage the balance of power. Although the LCPD
directive was a ‘command and control’ regulation, the generators were able to use the
existence of contradictory structures, the absence of resources, and weak rules to negotiate a
significant consultation process to effect policy change. Their actions resulted in the
introduction of the 2011 Whitepaper ‘Energy Market Reform’ (DECC, 2011).

This study will analyse those actors who take part in the decision making process by
examining how environmental directives, such as the Pollution and Prevention Control (PPC)
and the LCPD, were implemented within the UK and their consequences. This process will
reveal how industry reluctance to commit capital to developing new technology resulted in
the threat of blackouts in the UK, creating a debate as to who would supply the £200 billion
capital required.

This study identifies the complex struggle for power within the generation industry set
within the paradox of achieving strict environmental targets, creation of profit and the
security of supply, with the winner being determined via the investment decision process.
International generators demonstrated a ‘wait and see’ approach to investment, using
accounting techniques to justify a strategic policy that placed them in a position of power.
This power was then used as a means to provoke a discourse that enabled the generators to
establish their own needs.

This is not a direct study of accounting change, but of how existing accounting structures
were used to facilitate a process of political and social change to establish new business
models within liberalised industries; thereby lending great significance to some of the rules
and resources connected to accounting.

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Giddens assumes actors and agents are synonymous, however, for the purpose of consistency the word ‘actor’ will
be used throughout this research.
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Contents

Abstract .................................................................................................................................. 3
Figures .................................................................................................................................. 11
Tables ................................................................................................................................... 13
Academic Thesis: Declaration of Authorship ...................................................................... 15
Acknowledgments ................................................................................................................ 17
Abbreviations and Acronyms ............................................................................................... 19
Chapter 1: Introduction ........................................................................................................ 25
1.0 Introduction ........................................................................................................... 25
1.1 Personal inspiration for this thesis ............................................................................. 27
1.1.1– Background and rationale for the study ............................................................ 27
1.2 The political, social and financial background to the industry .................................. 31
1.2.1 Regulation, sustainability and investment .............................................................. 33
1.2.2 The White Paper, 2011 ........................................................................................ 39
1.3 Theory and method. ................................................................................................... 41
1.4 Aims of the study and the contributions .................................................................... 42
1.5 Design and Structure of the thesis .............................................................................. 44
1.5.1 Chapter 2, Literature review on investment appraisal ........................................ 47
1.5.2 –Chapter three, Methodology and method .......................................................... 48
1.5.3 Chapter four: Theory ........................................................................................... 48
1.5.4 Chapter five: Analysis “What frame of reference is used when communicating
and making investment decisions?” ............................................................................. 49
1.5.5 Chapter six: Analysis “What are the social, political and economic factors
influencing investment in this industry – what are the norms and sanctions?” ........... 49
1.5.6 Chapter seven: Analysis “What resources are used when making investment
decisions, what are the sources of power?” ................................................................. 50
1.5.7 Chapter eight: “What role does investment appraisal play in the investment
decision-making process within the UK electricity Industry?” ................................... 50
1.5.8 Chapter nine, Conclusion .................................................................................... 51
Chapter 2: Literature review ................................................................................................ 53
2.0 Introduction ................................................................................................................ 53
2.1 What is investment appraisal? .................................................................................... 54
2.2 – Capital budgeting in mainstream accounting literature .......................................... 55
2.2.1 – Mainstream research within the electricity industry ........................................ 58
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2.2.2 Limitations of current research in the electricity industry ...................................61
2.2.3 – Agency and contingency theory and capital budgeting ....................................62
2.2.5 Alternative behavioural research and capital budgeting ......................................64
2.3 –Interpretive Studies of capital budgeting ..................................................................65
2.3.1 Interpretive studies in accounting literature .........................................................66
2.4 Sustainability in general ..............................................................................................67
2.4.1 Sustainability in accounting .................................................................................69
2.5 Regulation ...................................................................................................................71
2.5.1 Environmental regulation in general ....................................................................72
2.5.2 Environmental regulation in accounting ..............................................................73
2.5.3 Environmental regulation in the generation industry ...........................................75
2.6 Conclusion ..................................................................................................................76
Chapter 3: Methodology and method ....................................................................................79
3.0 Introduction .................................................................................................................79
3.1 Methodology – epistemology and ontology within management accounting ............80
3.2 Interpretive research ....................................................................................................84
3.2.1 Interpretive research from an inter-subjective position .......................................85
3.2.2 Validity and reliability in interpretive research ...................................................85
3.3 Using interpretive research in this thesis ................................................................87
3.3.1 Pragmatist Philosophy..........................................................................................89
3.3.1.1 Abductive reasoning: How pragmatist philosophy will be adopted in this thesis
.......................................................................................................................................91
3.4 Suitable research methods for the chosen methodology .............................................92
3.4.1 Case study method ...............................................................................................93
3.4.2 Data collection – tools and design .......................................................................95
3.5 Conclusion ..................................................................................................................98
Chapter 4: Theory ...............................................................................................................101
4.1 What is theory? .........................................................................................................102
4.1.1 Level of theorising .............................................................................................103
4.1.2 Contributions of theory ......................................................................................104
4.2 Giddens – Structuration theory .................................................................................105
4.2.1 The agent ............................................................................................................106
4.2.2 Structures and systems .......................................................................................108
4.2.3 Duality of structure ............................................................................................109
4.2.4 Structures: signification, legitimation and domination ......................................110
4.2.5 Power .................................................................................................................110
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4.3 Criticisms of Giddens’ ST ........................................................................................ 113
4.4 What does ST offer accounting research? ................................................................ 115
4.4.1 Duality perspective in accounting research....................................................... 116
4.4.2 Social structure is comprised as three interrelated structures; signification,
domination and legitimation ...................................................................................... 125
4.4.3 A basis for theorising both accounting continuity and change ......................... 128
4.5 How structuration theory is used within this research ............................................. 129
4.5.1 How structuration theory is used to refine and design this thesis ..................... 130
4.6 Conclusion ............................................................................................................... 134
Chapter 5: Analysis – the role of investment appraisal, signification ............................... 137
5.0 Introduction .............................................................................................................. 137
5.1 Signification ............................................................................................................. 138
5.2 Establishing a framework for understanding the LCPD – the regulatory framework
........................................................................................................................................ 139
5.2.1 Analysing the directive at policy level .............................................................. 140
5.2.2 Analysing the directive at an individual site level ............................................ 144
5.3 The missing frame of reference – sustainability ...................................................... 147
5.4 The existing frame of reference – investment appraisal for investments................. 149
5.5 Merging the frames of reference to make investment decisions .............................. 153
5.5.1 The business plan as a tool for merging frames of reference ............................ 154
5.6 Overlapping social systems ...................................................................................... 158
5.6.1 International companies communicating on an international portfolio level.... 158
5.6.2 Overlapping regulatory frames of reference ..................................................... 162
5.7 Communication and ontological security ................................................................ 165
5.8 De-coupled and missing frames of reference ........................................................... 166
5.7 Conclusion ............................................................................................................... 168
Chapter 6: Analysis – what are the norms? Legitimation: Examining the changes in social,
political and economic factors ........................................................................................... 171
6.0 Introduction .................................................................................................................. 171
6.1 How Investment norms have changed throughout history in the UK electricity
generation market ............................................................................................................... 173
6.2 ‘Norms’ in regulation ............................................................................................... 183
6.3 ‘Norms’ in investment ............................................................................................. 189
6.3.1 The impact on investment of accounting standards .......................................... 193
6.4 ‘Norms’ in sustainability .......................................................................................... 196
6.5 Why the ‘norms’ and ‘sanctions’ are in a state of uncertainty ................................. 198
6.5 Conclusion ............................................................................................................... 207
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Chapter 7: Analysis – the role of investment appraisal: Domination .................................209
7.0 Introduction ...............................................................................................................209
7.1 Domination................................................................................................................210
7.2 Resources influential in the decision making process ..............................................212
7.3 Mobilising power ......................................................................................................213
7.3.1 Mobilising power when making investment decisions ......................................214
7.4 Mobilising power – the environment ........................................................................225
7.4.1 Lobbying and debating to mobilise power .........................................................228
7.5 Mobilising power – sustainability .............................................................................239
7.5.1 Real options create opportunities to mobilise power .........................................244
7.6 Resources needed to make investment happen in the UK generation industry ........247
7.7 Conclusion ................................................................................................................248
Chapter 8 – Structuration theory and capital budgeting .....................................................251
8.0 Introduction ...............................................................................................................251
8.1 The role(s) of investment appraisal ...........................................................................253
8.2 Linking the modalities of structuration theory ..........................................................254
8.3 The role of accounting across the modalities of ST ..............................................256
8.4 Capital budgeting across the modalities of structuration theory ...........................257
8.4.1 Capital budgeting as a ‘frame of reference’ .......................................................258
8.5 Capital budgeting influencing the ‘norms’ ...............................................................264
8.6 Capital budgeting and domination ............................................................................268
8.6.1 Exploring the strategic nature of IA as a mediating tool, exposing high risk
factors ..........................................................................................................................273
8.7 Why capital budgeting became a strong mediating device - Real options ...............275
8.8 Problems are UK specific - Overlapping social systems ..........................................278
8.9 Capital budgeting influencing change.......................................................................280
8.10 Conclusion ..............................................................................................................283
Chapter 9 – Conclusion .......................................................................................................287
9.0 Updated overview of the industry .............................................................................288
9.1 Overview of the research ..........................................................................................290
9.2 Examining how the structures are entwined .............................................................294
9.3 Contributions .............................................................................................................298
9.3.1 Contribution to knowledge.................................................................................298
9.3.2 Contributions to industry ...................................................................................299
9.3.2.1 Contributions to Policy implications...............................................................302
9.3.3 Methodological contribution ..............................................................................302
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9.3.4 Theoretical contribution .................................................................................... 303
9.4 Limitations ............................................................................................................... 305
9.5 Future studies ........................................................................................................... 306
9.6 Conclusion ............................................................................................................... 306
Appendices ......................................................................................................................... 309
Appendix 1 - Timetable for the LCPD to be implemented in the UK ........................... 309
Appendix 2 - Stage one initial consultation process ...................................................... 310
Appendix 3 - Value chain of UK electricity generation industry .................................. 311
Appendix 4 - List of plants directly affected by the LCPD ........................................... 315
Appendix 5 - Detailed explanation of regulations: LCPD and IPPC ............................. 317
Appendix 6 - Capacity and demand for electricity in the UK........................................ 323
Appendix 7 - List of nuclear plants closing down ......................................................... 324
Appendix 8 - Current portfolio within the UK, dates when the investment occurred ... 325
Appendix 9 - The use of semi-structured interviews ..................................................... 326
Appendix 10 - Taping of interviews .............................................................................. 327
Appendix 11 - Explanation of interviews and consent .................................................. 328
Appendix 13 - Coding of data ........................................................................................ 331
Appendix 14 - Limitation of data collection at stage three ............................................ 332
Appendix 15 - Interviews and key informants of main stage collection........................ 334
Appendix 16 - Example letter requesting interview ...................................................... 336
Appendix 17 - Interviews and key informants of main stage collection........................ 337
Appendix 19 - Involvement of all actors within this case study .................................... 340
Reference list ...................................................................................................................... 343
Key informants from Industry conferences........................................................................ 373

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