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Using investment appraisal models in strategic negotiation:
the cultural political economy of electricity generation
Authors:
Elizabeth Warren [email protected] University of Greenwich – lead contact
Will Seal University of Loughborough
Abstract: Building on the work of Miller (1991) and Miller & O’Leary (2007), the paper shows
that the prescriptive calculative techniques of investment appraisal may be used as negotiating
instruments in a regulated industry setting. The paper draws on cultural political economy
(Jessop, 2013) and pragmatic constructivism (Nørreklit et al., 2006) to interpret and evaluate an
empirical study of the UK electricity generating industry in terms of constructed imaginaries and
actor-realities. Under pressure to change its technology to meet environmental demands on
pollution, the generators raised the possibility of an investment hiatus leading to power cuts and
black-outs. The papers shows that the normative model of investment appraisal plays a
discoursal role as it frames the negotiations between the actors in a way that limits the apparent
choices available to policymakers. In addition, the discourse of crisis associated with black outs
hides a suspicion that the generators would, in their own terms, define crisis in terms of falling
rates of profit or threats to private property rights. On its part, the UK state’s freedom of action is
not only constrained by the discourse of investment appraisal but also limited by rules that
restrict state action by members of the European Union (EU).
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Key words: investment appraisal – electricity generation – environmental sustainability –
power cuts
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Introduction
The political and economic setting for this paper concerns the type and timing of investment in
new electricity generating plant. Although the fieldwork is based in the UK, much of the
conceptual analysis could be applied in other geographical and political domains. Thus although
the research methodology is applied to specific policy and business issues, the questions about
investment decision making in such a strategically vital and environmentally sensitive industry
are couched in quite general terms. How are investment decisions made and by whom? What are
the values, logics, and facts that influence these decisions? Much of the literature on IA still
conforms to the observation made by Northcott (1991) that ‘DCF concepts were born of the
economic literature, and brought with them many of the basic premises of neo-classical theory’
(p. 221), with notions of economic efficiency and shareholder wealth maximisation. Mouck
(2000:282) points out that capital investments involve complex decisions that are part of ‘actor /
artefact networks, as well as the related opportunities for economic actions and are likely to be
emergent phenomena that are generated by the interactions of actors’. In other words, decision
making is a complex process that requires an understanding of those actors making the decisions.
Although Bower (1972) stressed that there was a need to address the process of capital
budgeting, there is little evidence that researchers have done so (Miller and O’Leary, 2007).
Furthermore, Miller and O’Leary (2007) show that capital budgeting needs to be considered
relative to complex managerial situations where capital budgeting practices can be used
strategically as mediating tools.
In this paper, we argue that particular models of investment, well known in accounting
circles, are not passive calculative techniques as suggested by the normative literature of the
textbooks. We argue that the investment models not only help actors construct their reality in a
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complex and changing environment but are mobilised as negotiating instruments. This argument
builds on and develops research that locates technical techniques within a wider social, economic
and institutional setting (Bower, 1972; King, 1974; Miller, 1991; Miller & O’Leary, 2007).
These economic and political settings are analysed through the mobilisation of two emerging
theoretical and methodological strands; cultural political economy (Jessop, 2013) and pragmatic
constructivism (Nørreklit et al., 2006; Nørreklit, 2011).
The normative literature on IA in the textbooks assumes certain taken for granted values
such as shareholder wealth maximisation, which in a privatised power industry of the form found
in the UK seems quite plausible. Yet paradoxically, one of the key aspects to realise about the
UK industry is that despite some “local” sounding names, such as Scottish Power 1 , the
ownership of the main generators is located outside the UK. Even more paradoxically, the home
bases of some of these electricity generators are located in states where electricity generators are
either partially or totally publically owned. For some of these generators their home base not
only provides them with commercial security irrespective of outcomes in the UK, it also means
they need not share in the UK’s political, economic and ideological positions. In addition, the
main environmental regulations are imposed by either supra-national organisations such as the
European Union or international protocols covering commitments on issues such as carbon
emissions. Thus, key players are located in different states with different political and economic
relationships (Jessop, 2002).
Different national contexts can impact on the perceived relationship between the economy on
the one hand and science and technology on the other. For example, do values derived from
economic goals drive choice of technology, or are non-economic arguments, such as national
objectives to develop a particular scientific/technological capability, primary motivators? The
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differences in the values, logics and facts will be elaborated below, as each player’s stance
towards proposed investments in electricity generation is set out in some detail. As will be
demonstrated, although the initial stances of the generators, the government and the regulators
may vary, a shared language can be found in the concepts and practices of IA. Furthermore,
given that an understanding of capital budgeting and discounted cash flow (DCF) models among
the players, economic investment models lie at the heart of negotiations and game playing
between generators, regulators and policy makers (Hoffmann, 2007). It will be argued that the
shared language and logics of IA play a discoursal role for, as Hall put it, discourses ‘do not just
describe things; they do things’ (2001, p. 72).
Since the objective of this paper is to understand investment appraisal in complex
organizational settings, this study draws on Miller (1991) and Miller and O’Leary (2007) as key
sources on capital budgeting/IA. Miller and O’Leary (2007) argue that capital budgeting is not
only about evaluation techniques by showing that capital budgeting can link the plans of
companies in the same industry and bridge the gap between science and economy. Miller’s
(1991) paper is also valuable in that it defines the key actors to be discussed on this paper, firms
and governments, in a way that is both insightful and consistent with our methodological and
theoretical positions. Miller defines the firm as a dispersed social agency, which is a ‘site or
point of intersection of quite disparate social mechanisms and calculating practices including
legal conditions, financial strategies and distinct processes of labour’ (1991, p.736). He sees a
notion of government, that ‘directs attention in particular toward programmatic statements,
claims and prescriptions that set out the objects and objectives of government and to the
technologies’ where ‘the wide range of calculations, procedures and mechanisms that help to
operationalise certain abstract objectives’ (1991, p. 736).
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This paper offers two main sources of conceptual novelty for the analysis of investment
decision making. A first source of novelty lies in a theoretical framework based on cultural
political economy (Jessop, 2013). Cultural political economy (CPE) combines economic and
political relations with a semiotic dimension, arguing that ‘all social phenomena have semiotic
and material properties’ (Jessop, 2013, p. 3). Because the world is immensely complex, actors
have to be selective about which features they attach meaning to. In the economic sphere,
practitioners draw on economic imaginaries, which are semiotic ensembles ‘which identify,
privilege, and seek to stabilize some economic activities from the totality of economic relations’
(Jessop, 2013, p. 4). In the specific context of this paper, the key economic imaginary is the IA
model that privileges particular projected aspects of economic activity such as cash flows, risks
and discount rates. Yet the concept of the imaginary need not be confined to the economic
sphere. For example, environmental regulators also draw on imaginaries, although these are
more likely to be based on non-economic values and logics that derived from environmental
discourse. Yet even the environmental debate has seen an increasing influence of the IA
discourse as is shown by current debates on the “correct” long term discount rates (Arrow, et
2012).
One of the benefits of the CPE framework is that not only does it reveals the implicit
assumptions that underly the conventional investment models, but it also enables a broader
perspective on the notion of crisis. As will be elaborated later, crises play a crucial role in
inducing changes in imaginaries. But what is a crisis in the context of electricity generation? To
many, the possibility of electricity outages/blackouts would constitute a crisis. Yet blackouts
have occurred in the USA without leading to significant changes in the ownership or mode of
electricity production. In a CPE framework, it is possible to define crises through the criteria of
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political economy whereby crisis is perceived by capitalists not in terms of blackouts but in
terms of threats to private ownership and/or falling rates of profit.
The second source of conceptual novelty in the paper lies in the application of pragmatic
constructivism (Nørreklit et al., 2006) and practical validity (Nørreklit, 2011) in order to both
elaborate and evaluate the imaginaries of the key players. For example, an imaginary is adjudged
to be practically valid if it is based on reality rather than on illusions and offers a way of testing
the specific negotiating positions of the main players. The concept of practical validity is
intimately related to a view of reality based on pragmatic constructivism (PC). In PC, reality is
constructed by actors through the integration of a number of different elements: facts, values,
logics and communications (Nørreklit et al., 2006; Jakobsen, 2011). With a PC view of reality,
imaginaries would be adjudged to be invalid if actors fail to construct individual elements such
as facts, which are seen as a relationship between the actor and the world (Nørreklit, 2011)
and/or a failure to integrate the four dimensions of reality. In this methodology, economic
imaginaries such as DCF offer a way of constructing reality as they offer a particular way of
constructing facts, mobilising values, and linking these elements using particular logics and
particular types of communication. Yet the approach recognises that some of the facts in the
industry, particularly those relating to technology and the environment, have an element of
‘brutality’ (Searle, 1995) that would be hard to reconcile with extreme versions of social
construction (Nørreklit, et al., 2006; Fairclough, 2005). As will be shown, the facts facing the
actors in the electricity generation industry are affected by how they interact with ‘things’
through other dimensions of their reality, such as possibilities, values and communication.
The methodological and theoretical framework discussed is deployed to interpret an original
field study on the impact of a revised environmental regulation, the Large Combustion Plant
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Directive (LCPD), on the UK electricity generation industry. The theoretical framework shows
how IA techniques helped to construct a future “reality” of black outs and power cuts caused by
a failure to invest in new generating capacity. In short, investment models became rhetorical
devices used strategically by the generators to change the policy of the UK government by
demanding a reduction in risk through clearer guidance of preferred future technology and
movements towards guaranteed prices for electricity, in some cases.
The paper is organised as follows. The next section draws selectively on capital budgeting
literature, with special reference to the electricity generation industry and develops the
methodological and theoretical foundation of the paper. The third section introduces the
regulatory and policy setting for investment decision making and negotiation processes and
interprets these processes in light of original fieldwork. Section four develops some broader
propositions on the role of capital budgeting practices in the complex negotiating scenario of
electricity generation.
2. Conceptualising capital budgeting as a negotiating instrument: cultural
political economy and pragmatic constructivism
Although the goals of the regulators (reducing pollution) and the government (security of supply)
are largely expressed in physical and scientific terms, the chosen mode of regulatory and policy
intervention is mostly economic, involving manipulation of prices for electricity and carbon
(Hoffmann, 2007). In this regulatory context, the actual techniques of investment appraisal, such
as DCF and real options, are relevant, not because they necessarily determine the final decisions
on when, where and how to invest, but because they are understood and accepted by all the
parties involved in negotiations as key regulatory decisions affecting future pricing. A decision
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to invest in an existing or new power plant within the UK electricity generation industry requires
a long term assessment of known and uncertain costs and the risks related to such investment
(Safarzynska & Van den Bergh, 2011). Because of the mutual acceptance of well-known
investment calculations and logics, all parties to the negotiations are able to construct a view of
the future in which electricity prices become key inputs into the calculation process. As Pfeiffer
and Schneider (2010, p.1) put it, the process of capital budgeting “defines a set of rules to govern
the way in which managers at different levels of the hierarchy produce and share information
about investment projects”. These rules can be extended to incorporate the communication
process within the organisational field of the electricity industry, which includes the regulators
and government ministries and private generators.
Cultural political economy: investment appraisal models as economic imaginaries
In order to develop the negotiating role of IA, a specific theoretical framework is necessary to
facilitate exploration of the dynamic relations between the various players. In particular, given
that the investment outcomes in the industry are partly the result of negotiations between
generators, regulators and government, the rhetorical devices deployed need to be understood.
Thus, in this paper, we explicitly accommodate the discoursal view by emphasising a cultural
version of political economy. As Jessop (2013) explains, the term cultural political economy
(CPE) does not imply a three dimensional view of politics, economics and culture but rather a
combination of the material and the semiotic.
In the history of ideas, the term political economy usually implies a specific perspective on
both politics and economics and is associated with classical rather neoclassical versions of
economic theory (Blaug, 1997). There have been several examples of the application of political
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economy in the accounting literature, for example see Cooper and Scherer (1984). Although a
classical political economy is usually associated with economic determinism, the CPE has
emerged in recent years as a more nuanced version, acknowledging the power of discourse and
the social construction of economic relations (Jessop, 2002; 2013; Fairclough, 2006). Focusing
on ontology, CPE embodies the view that since the world is so complex, social agents ‘must
reduce complexity by selectively attributing meaning to some of its features rather than others…’
(Jessop,2013:3) These agents draw on what Jessop (2013) terms imaginaries. An imaginary is ‘a
semiotic ensemble (without tightly defined boundaries) that frames individual subjects’ lived
experience of an inordinately complex world and/or guides collective calculation about that
world’ (Jessop, 2013, P4). Imaginaries may have different applications; for example, in our
paper, the generators are particularly concerned with economic imaginaries. Jessop explains
economic imaginaries as follows:
Economic imaginaries have a crucial constitutive role here insofar as they identify, privilege, and
seek to stabilise some economic activities from the totality of economic relations. They give
meaning and shape thereby to the ‘economic’ field but are always selectively defined. As such
they typically exclude elements – usually unintentionally – vital to the overall performance of the
subset of economic (and extra-economic) relations that have been identified (2013, p.4).
Other actors in the industry who may influence investment decisions, will also draw on
imaginaries but may not place the same emphasis on the economic. For example, environmental
regulators place more emphasis on science and technology, whilst governments emphasise
political dimensions. Given the global nature of the generating industry, we may expect to see
geographical diversity influencing the generators, as they may have a different political
imaginary from the UK’s post-privatisation focus on market solutions. A particular strength of
CPE is that it offers a way of explaining the variation, selection and retention of particular
imaginaries. Crises play an important role as they loosen sedimentary social relations, leading to
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semiotic variety and the possibility of novel solutions. Jessop (2013) focuses on the post-2008
world financial crisis, but similar effects can be found with crises induced by natural disasters,
such as earthquakes. For example, the Tsunami in Japan not created a Japanese policy debate
towards nuclear power, but this also made an impact in the UK. The UK reconsidered its policy
on nuclear following the Tsunami disaster but has since decided to continue supporting
technology in this area (World-Nuclear, 2013) .
Elaborating the ontological framework of CPE with pragmatic constructivism
Although the CPE is underpinned by an ontological paradigm (Jessop, 2013), we contend that
that this requires further elaboration. In particular, that a more fine-grained perspective could
help to unpack the various imaginaries deployed in industry negotiations, thereby revealing their
values, logic, facts and communication modes. In particular, we wish to develop an approach that
will elaborate on the link between science and economy (Miller and O’Leary, 2007). Finally, we
seek to develop conceptual approaches that can be used to evaluate the imaginaries of the various
agents and understand the public policy complexities.
To address these goals we draw on the ontology of PC (Nørreklit et al., 2006; Nørreklit,
2011). PC does not focus on one aspect of individual or organisational life, such as calculation or
communication, but rather argues for an integration of ‘four dimensions – fact, logic, value and
communication – each of which is a necessary source of reality’ (Nørreklit et al., 2006, p. 43). In
the PC framework some facts are what Searle (1995) would characterise as ‘brute facts’, which
exist independent of human consciousness. In an electricity generating context, existing power
plants are the result of human construction and ingenuity, based on the principles of physics and
chemistry and subject to physical forces. Yet other facts such as money, economic value and
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profit are more usually at the forefront in social or institutional constructions (Searle, 1995;
Nørreklit, et al. 2006). Many facts can be defined by their possibilities or logic, the second
dimension. Although possibilities are grounded in facts, “all matters of fact are loaded with
possibilities ... the nature of everything is determined by possibilities and impossibilities that are
integrated in things … a door that cannot be opened, because in reality it is part of the wall … is
no real door” (Nørreklit, 2011, p. 27). The PC framework sees managers and other organisational
members as reflexive actors, constantly monitoring both existing and alternative practices. In
short, considering different possibilities. As Nørreklit (2011, p. 25) explains, possibilities are
‘constructs of something that does not presently exist based on something that does exist … (T)o
construct possibilities, one must perform logical operations’.
Since actors need to be motivated, a third dimension of reality is values. Unlike in
neoclassical economic theory, the PC approach does not assume a particular universalist set of
individualist or self-seeking values. Since values are a person’s motivating force, Nørreklit et al.
(2006, p. 47) argue that ‘if the world does not appeal to the values of a person, that person
becomes passive’ and ‘managers should recognise and respect the values of employees in order
to strongly motivate them’. If managers and or employees are self-seeking and individualistic,
this may be because wider cultural values encourage such attitudes. As will be argued later, the
logic and values of business actors are not constructs devised by academic economists, but rather
characterise popular culture in capitalist societies.
The final dimension of reality is communication. Communication plays a unique role in
management control, integrating the other dimensions, as it ‘formats the organisation as a
common space of meaning’ (Nørreklit, 2011, p. 30). Communication is far more than just a
simple exchange of information solely composed of facts. It not only helps to construct
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alternative dimensions of reality but also to integrate them via organisational and institutional
arguments or rhetorics, known in PC as topoi2. Topoi concerns the arguments deployed by actors
in specific organisational and institutional settings. There is an implicit concern in PC that actors
base their decisions and actions on a reality composed of valid individual dimensions and an
overall integration of the various dimensions of reality, to avoid delusions, illusions, fantasies
and fictions (Nørreklit et al., 2006; Nørreklit, 2011).
This PC framework (see figure 1) is used in this paper to analyse how managers construct
their reality and develop the concept of a management control topoi, in an attempt to integrate
the four dimensions. If integration is successful then managerial actions are based on the concept
of practical validity (Nørreklit, 2011). If the integration between the dimensions is faulty, or if
one or more of the dimensions are faulty, then actions are based on illusions (Nørreklit, 2011). In
this paper, the PC framework is used to analyse and decompose the arguments of the main
players in the electricity generating industry to reveal their foundation in values, logic, facts and
communication modes. Given that the agents involved in negotiations will claim their arguments
are factually based, a further use of PC is to explore the notion of facts. In PC, facts are not the
same as things, but are based on the relationship between actors and the world, and so ‘loaded
with possibilities’ (Nørreklit, 2011, p. 27); i.e. a door is defined by the property that it opens - a
door that cannot open is not really a door. The third use of PC is to show that although the
financial IA model is clearly founded in the logic/possibility dimension, it not only draws on
values and facts, but also has a communicative element that helps to construct the actors’ reality.
Facts
Logics/ possibilities
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Actors’ reality
Communication
Values
Figure 1 Pragmatic constructivism and actors’ reality (adapted from Nørreklit et al., 2006)
3. Investment and regulatory pressures: some evidence from the UK
electricity industry
Electricity is a fundamental part of our daily lives. It lights our homes and streets, keeps our
schools and hospitals running, and powers our businesses. That’s why it is so important that the
electricity market works effectively (DECC, White Paper, 2011).
We need £200 billion of new investment to replace outdated stock, or the lights will go off
(Charles Hendry, Minister of State, 21st October, 2010).
Since the market was privatised in the 1980s the system has worked: delivering secure and
affordable electricity for the UK. But it cannot meet the challenges of the future” (The Rt. Hon.
Chris Huhne MP, cited within DECC, 2011).
The global power market…… may be described as an odyssey, an epic journey into the unknown.
Certainly, the pace of change continues to gather speed, with new products, markets, problems
and solutions appearing almost daily, making it virtually impossible to predict with any real
accuracy what form the power market will hold even a year hence” (Applyard, 2001, p. 1).
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These four quotations reflect both implicit and explicit assumptions that will be considered in
this study; arguing that electricity generation is vital; that huge uncertainties surround future
generation; that new investments will be made in a private market context; and, that although
electricity supply problems are regarded as local issues to be resolved by national governments,
the main electricity generators are multinational giants who view markets in global rather than
national terms. However, these quotations do not cover an additional, crucial element of the
current electricity generation context; that is, its centrality to international concerns and debates
about pollution, climate change and energy sustainability. In addition, the transition of the UK
electricity generation market to one which is sustainable is inconceivable without some
considerable restructuring of the market (Safarzynska & Van den Bergh, 2011). In short, issues
of regulation and sustainability3 are central to any understanding of investment in electricity
generation in the twenty first century (Hoffmann, 2007).
This section begins by briefly outlining the process of the fieldwork and then the economic
and political background of the UK electricity industry. The inclusion of this background
material is important as it enables an understanding of the special role of IA practices in a
privately owned but highly regulated industry. It is then argued that, given the regulatory
environment, IA practices have become implicated not just in mediation within and between
organisations (Miller & O’Leary, 2007), but also in negotiations conducted between the industry
and the regulators. The focus then turns to how the generators have responded to these
environmental regulations and how the regulations have shaped their investment plans.
Fieldwork and interview evidence
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The case study fieldwork is based on the investment decision making processes applied to the
UK electricity generation industry, focusing on the impact of the LCPD. Hussey and Hussey
(1997:65) argue that a case study is “an examination of a single instance of a phenomenon of
interest”, which in this study was the impact of the LCPD on investment decisions. This case
study was longitudinal in nature and across the six years 4 many different organisations were
consulted as part of the analysis (including five of the big six generators), but their individual
aims are not examined in detail, as it is the combination of information from the different
sources, as it pertains to the industry as a whole, that is relevant to this analysis. The narratives of
the actors were collected using semi-structured interviews, which were audiotaped and
transcribed. The interviews included generators, regulators, financial analysts and consultants.
By incorporating the views of all the stakeholders it is possible to represent the reality of all
those involved in the decision making process, rather than being limited to one actor’s
interpretation. The shareholders and political influences that sat outside the main framework
were analysed using documentation such as shareholder reports and White Papers. In addition
their views were also collected by attending industry conferences where the government
ministers, CEOs of the generators and regulators would debate future policy and needs.
Evolving industry and regulatory imaginaries: from privatisation through to regulated oligopoly
Power stations have very long lives, and so the assets within the industry have survived many
changes in government with much of the generating capacity originating from the preprivatisation era. After privatisation in 1990, there have been significant changes in the market
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structure and the regulatory focus within the UK electricity industry. The privatisation of the
electricity industry was expected to provide a competitive marketplace. Immediately after
privatisation, the electricity industry was highly concentrated; the market was shared between
three major generators of electricity: National Power, Powergen and Nuclear Electric (Dnes et
al, 1989). Yet, in the first eleven years after privatisation, the industry witnessed an influx of new
international companies, so that by 2001, the market structure of the electricity industry had
changed dramatically. There were in excess of 40 generators, a power pool replacement model
known as the New Electricity Trading Agreements (NETA), and full retail competition.
Following the introduction of NETA, market competition became very intense; principally
because the industry had a full open market with too much capacity. Electricity prices dropped
and the market became saturated causing the smaller players either dropped out of the industry or
in many cases became bankrupt. By 2011/12, the six large electricity generation companies
owned 71.3% of the UK’s generation capacity (Seris, 2012), competition had reduced
significantly. The main ten owners can be seen in, figure 2, which reveals that only three of the
ten are UK owned companies, a drop from 6 in 2006 (the beginning of this study). The report by
Series (2012) also documents that 19.9% of the sector is owned by governments within the EU,
other than the UK.
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Figure 2 - The big ten UK electricity generating companies (measuring MW along the
horizontal axis.)
The UK government maintained a regulatory structure through the office of gas and
electricity markets (OFGEM) that recognised the centrality of the electricity generation/supply
and the possibility for monopoly abuse in a privatised utility. In addition to the regulation
concerned with economic issues, the industry was also subject to international regulation of
pollution and carbon production. Although the main regulatory context of this paper is the
revised LCPD directive, which was introduced in order to reduce Nitrogen (NO2), sulphur
dioxide (SO2) and particulates, other regulatory efforts (related to concerns about carbon
emissions and their possible impact on global warming) have played a part in the resulting crisis
outcome. In Europe, the EU has implemented an EU European Emission Trading scheme, which
all the electricity industries across Europe are subject to. The aim of this carbon trading scheme
is to reduce Carbon Dioxide (CO²) emissions and encourage low carbon investments. The recent
history of the industry is presented schematically in figure 3. As noted in figure 3, DCF was, at
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least symbolically (Miller, 1991) an element in the industry investment imaginary prior to
privatisation. However, other values and logics based on engineering, employment and politics
had a greater impact on the timing, technology and location of new generating capacity.
Figure 3. Schematic history of the main players in the UK electricity generation industry
The impact of the LCPD
The LCPD in the UK was part of the Pollution Prevention Control (PPC) application. In the UK,
if a generator does not have PPC consent then they cannot continue in business5. The
introduction of a revised LCPD in the mid-2000s presented generators with an invaluable
opportunity to use their engineering knowledge to influence a new regulatory framework that
would have a direct impact on investment decisions. The engineers are more knowledgeable
about the technical aspects of the industry than the regulators, and this meant their expertise was
needed to help construct new processes.
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During the time frame that the LCPD was being revised and implemented in the UK, the
government’s focus was concentrated on making stronger environmental commitments, with less
concern for security of supply 6 . The government argued that the market would resolve any
investment problems and were assured by the regulators’ reports at that time that they did not
envisage any future supply problems. By 2006, there was confusion within the industry relating
to how the LCPD would be implemented and also about the direction of the future energy policy.
Although there were new sanctions in place for those generators that failed to comply with the
LCPD there were no supporting frameworks or procedures in place to assist investment
decisions.
In short, the UK government hoped to achieve security of supply and meet environmental
protection targets, whilst maintaining an ideological commitment to a privatised industry with a
commitment that investment must be market led. With reference to these conflicting pressures,
the field data collected from the generators shows how the practices and processes of IA lay at
the heart of negotiations between the generators, the government and the regulators. Figure 4
shows the relationship between the regulators, governments, generators and other industry
players such as consultants.
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Figure 4 – Relationships between regulators and the main industry players
Analysing the LCPD: a head office perspective
Whilst the regulators and government were discussing the future of the industry the directive
itself was communicated to the generators through forums such as the JEP and the Association of
Electricity Producers (AEP). In addition the forthcoming directive was discussed in various
publications7. Before any discussions took place between the regulators and the generators, the
actors working for the generators familiarised themselves with the detail of the directive. All the
interviewees agreed that this was the first step in the process, and a Business Service Director
stated:
As soon as something like this is started …you read it quickly. It appears in bulletins
there are various legal firms who send out monthly bulletins on environmental matters.
There’s the Eng report . . . usually is quite a good hands on what’s emerging from Europe
etcetera. The AEP are active, and of course the people on the AEP are all separately
talking to Brussels and Westminster and others and they’ll very quickly send a note out to
say - blooming heck there’s something coming down the line called the LCPD.
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The revised LCPD resulted in a number of future investment possibilities, including;
investing in Flue Gas Desulphurisation (FGD) technology to reduce the pollution of existing
plants (this would be opting into the directive) or the generators would have to opt out of the
directive and could build a new plant with new technology that was compatible with green
policy. The revised directive resulted in the generators having a strategic interest in the
development of the new regulatory framework, because this could change the nature of their
organisation. The regulators and generators analysed the new directive to understand how they
could take the LCPD and make it workable within the UK. As an Environmental Planning
Manager explained:
A joint forum was created with the Environment Agency to make sure there’s a common
understanding from both sides as to what the implications would be for regulations. From
our point of view - and to also understand what’s required from the Environment
Agency’s point of view - to actually make sure they meet due diligence to make sure the
requirements are met.
During the consultation period, the rules were created through discussions with shareholders,
regulators, professional bodies and other governments specified environmental emissions targets,
such as Renewables Obligation (RO), LCPD, PPC and EU ETS. One Environmental Manager
noted:
We had meetings with Defra and meetings with the EA through our JEP forum. We
literally sat round a table and, you know, the EA tried to understand it as well. What does
it mean when it says that you will actually meet this limit on sulphur? But you have this
option to do it in a slightly different way. What does it mean? What are these type scales
on monitoring? How can we interpret that in terms of something the EA can transform
into a permit that we can actually carry out?
Although the generators and regulators were conversing, these conversations did not
necessarily imply that regulatory capture took place; there were many disagreements and in one
21
case a legal disagreement. The regulators recognised that they could benefit from the generators’
technical knowledge, and for their part, the generators chose to be engaged in the regulatory
debate for their own strategic reasons. Overall, it was regarded as standard practice for the
industry to work alongside the regulators because the conflict and disagreements could disrupt
the policy making if there was not a certain level of agreement (Sarasini, 2013).
In addition to the associations mentioned earlier, Defra established an LCPD stakeholders’
group encouraging all who were interested to engage in forums. Those involved on the
operational side of the business then received information based on the LCPD once an
investment decision had been made. The generators were aware that they were being asked to
make large investment decisions that would affect their future portfolio. They also recognised
that any proposals would have long lead times, because investigating suitable technologies takes
considerable time. In January 2006, the generators had no other option than to start preparing
business plans relating to future investment, whilst the details were still been debated about the
revised directive. It needs to be noted at this point that business proposals were not minor
investments, the investments to install equipment like FGD would cost in the region of
£210million for 1700MW (this would have a limited life span) and a typical new plant
investment would take up to five years of planning (2 years to reach consent of section 368 and
an addition three years to construct) costing on average £600milion for 1000MW (interview:
Regional manager).
22
Analysing the directive at an individual company and site level
Although the first part of the process was to understand the meaning and the content of the new
directive, the next step, as a Site Manager stated, was to understand the impact of the LCPD on
individual sites:
On a local level you need to think about how this relates to specific installations . . . how
it relates to perhaps those wider guidance documents that exist. I mean we did a lot of
reading of the regs . . . because not only do we have to make decisions when applying for
the permits, but we need to talk to the operators . . . because there is a huge chunk of
people left out of that dialogue.
The need for a detailed understanding of the directive led individual generators to lobby the
UK government for an appropriate framework on which to base the decision-making process.
Lobbying was an essential way to protect the future of individual power plants, given that each
generator had their own technical and future portfolio requirements. Working alongside the
regulator allowed each generator to understand the requirements of the directive; however, every
individual wanted a secure workable framework to match their own plant needs, and maintain or
establish their competitive positions within the market. As an Environmental Planning Manager
explained:
We’re always looking over the horizon . . . one of my jobs is to make sure we’re aware of
what’s coming up, and we have a good input in through the various avenues. We have the
government and the regulators and try to influence the way - for example in this case the regulations through the PPC Act were going to be framed to make sure the LCPD
needs were met.
It was clear that the revised LCPD would impact each site is different ways because the age
of each plant was different, as one Environment Head explained:
23
Different generators were looking at different types of investments - we were looking at
the long term because our plant was not due to shut down until 2030; however, some of
the others were due to shut down around 2016, they had short term investments to make.
The short term and long term decisions would have been much easier if there had been a clear
and practical national policy; this would have created more certainty within the industry, and
would have led to secure investment, by sending clear signalling as to the pricing curves used in
the investment models. With a clearer policy generators would have been able to establish
whether they would be better placed investing in updates on current assets or to build new plants
that would conform to future policy expectations. Therefore, although it was the introduction of
the revised LCPD that was the focus of the IA modelling, the modelling was incomplete because
of the missing definitions within the LCPD and the lack of coherent future energy policy. As one
Station Manager said:
We were trying to get a good indication from the Government on what was going to be
policy, going forward, you know you need them when you’re investing for thirty years
and spending hundreds of millions on them, yeah. There was no clear economic signals
from the Government and when you actually looked at FGDat Plant B at the time it was
marginal whether it . . . it paid for itself or not. So it was hard, hard to determine whether
you’re making the right business decision, for the shareholders.
Adding to this, an Environmental Manager stated:
You know you’re not going to be making an investment if you’re not getting a return on
that investment . . . there are a number of factors that need to be taken into account. But
effectively an IA would be made on the technology that’s required to meet the particular
limit, and if it didn’t come up . . . you know if it didn’t meet the required rate then you
know it’s unlikely to go forward.
The dominance of the IA imaginary in business planning for the LCPD
The actors recognised that the rate of return is essential for informing decision making. Indeed,
the interviews revealed that the language of the normative IA literature was also the natural
24
language (Arbnor & Bjerke, 2009) of the industry players. When first questioned about how
decisions to opt in or out of the LCPD were made, all the interviewees referenced the same
objectives and logics. The use of terms such as ‘rates of return’, ‘hurdle rate’, ‘NPV’,
‘investment appraisal’ and ‘scenario analysis’ were all embedded within the accepted ‘values’ of
the business. When discussing financial objectives, financial terms were the accepted language,
irrespective of whether the researcher was talking with engineers, environmental managers or the
regulators. Indeed, the basic financial terminology of IA was firmly established in combination
with the knowledge of how investments would be funded and the effect of risk on required
return. Each interviewee used the rate of return to justify whether an investment would be
accepted or rejected, thereby demonstrating that a shift from early post privatisation to mature
privatisation has taken place. Most of the interviewees were familiar with their own company
rate, although most were unable to provide the researcher with the information.
Although the generators used well known IA techniques, these were located within complex
business plan models, designed to capture the impact of the regulatory changes. As a Business
Services Director stated:
The energy management team have quite sophisticated planning models, they don’t just
do cash–flow analysis . . . they model a portfolio and the impact of emissions legislations
etcetera . . .
The use of such complex models meant that regulatory changes were perceived to alter the
viability of investments. As a Business Services Manager put it:
For a long time it looked like the FDG, for example, for the LCPD was not an
investment we wanted to make . . . but quite interestingly the rules on carbon changed
and that’s what swung the pendulum back in favour of the investment . . . at the last
second we decided to opt in. A guy suddenly realised that the changes made the models
go from red to black.(emphasis added).
25
The Business model united multiple frames of reference: finance, regulation and energy
policies as well as the missing data, on which assumptions were made. From the interviews, it
was apparent that the IA process was actually the central focus when discussing all the
information from the different specialists. All the data provided from the engineers,
environmental specialists, traders, risk specialists and legal specialists could be translated into
numbers that everyone could understand. An Environmental Manager commented that:
When we put together a board paper . . . they don’t necessarily crawl over the model. I
guess when we put together a board paper we hand it to them . . . they look at the
numbers and satisfy themselves that this is an accurate reflection of what’s required - not
from a technical perspective just from, from purely economic model and numbers have
been fed in there. So on any board paper we would say we’ve run this past insurance,
we’ve run this past risk, we’ve run this past finance and they’ve all signed onto this as a
business case model.
Investment decisions should be understood to be not based purely on the required rates of
return of a particular plant in isolation; there is always a reference to the future of the company’s
international portfolio, i.e. future models are not solely UK based. As a Business Services
Director noted:
The LCPD was a strategic investment and it was presented as such. It was fundamentally
about the future of our company. . . it was about cutting off our right arm or keeping it
sowed on. So all the strategic issues were presented, but behind that of course comes the
financial analysis and all the comparison of different options and risks and issues. But, it
was very much about working in a business . . . what do we want to be? Do we want to be
in or out and save £2009 million pounds and invest that elsewhere?
A Station Manager added:
I think the primary drivers are always profit and as part of that, you have, you have
policies - so for example, one of our key strategic drivers is to be a largest renewable
company in the world. Our organisation invests heavily in renewables around the world
because it believes strategically it’s the market to be in, it’s the growth industry.
The comments from both the Business Service Director and the Station Manager show that
although investment decisions were obviously related to making profit for the shareholders, there
26
were also wider considerations based on the values and global positioning of the parent
company.
The process of the decision making was complete by 2008 with all the LCPD investment
decisions decided (see table 1 for plants who opted out of the directive), and the result was that
more plants were marked for closure than to remain open and invest in FGD to achieve the
environmental targets. As the decisions were made and the opted out plants started to run their
20,000hr operational allowance it was apparent that many were using their operating hours hard
and fast to reduce the fixed costs associated with generation.
Company
TEC MW
Comment
Ironbridge
EON
964
Converting 485 MW to biomass
Kingsnorth
EON
1966
TEC withdrawn 3/2012
Didcot A
RWE
1558
Closed March 2013*
Tilbury
RWE
810
Ceases Q2 2013 Bio-refit?
Ferrybridge 1&2
SSE
994
Cockenzie
Iberdrola
551
TEC withdrawn 3/2013
Grain
EON
1355
Closed 31/12/2012*
Fawley
RWE
940
Closed 31/3/2013*
Littlebrook
RWE
1245
Reduction to 800 MW at 3/2013
COAL:
Oil:
Source: Ofgem (2012) with updates* from www.RWE.com and www.eon.com
Table 1. Opted out plant at September 2013
27
Table 1 provides the evidence that many of the opted out plants were shutting before the
anticipated 2015, exacerbating the strain on the security of supply. The earlier closure of many
plants, through the revised LCPD, along with the 2011 White Paper indicated a renewed interest
in the security of supply issue. At the end of the decade, the government finally announced that it
had come to accept that the industry as a whole required major changes and that the former arm’s
length approach had failed to deliver expected levels of investment. As Helm put it:
It’s an extraordinary volte-face to admit that a liberalised market won’t achieve its
objectives. They have argued against intervention and said markets would engage with
the issue of security of supply. The Irony is incredible (Helm as cited in Webb, 2010:1).
Although the electricity generators had been flagging up problems associated with providing a
security of supply since 2006, the government ignored their concerns. With no sanctions to
insure a reliable electricity supply, and because the government insisted that investment would
be market led, the generators felt no moral obligation to protect supply. In their view, the
generators were not to blame as they had been pushing for a full consultation on security of
supply matters from the outset of the debate. However, the generators were clear that ‘security of
supply’ was tied to guaranteed profitability based on a return to capacity payments, which would
increase their profits and provide more protection over their investments. The bulk of electricity
generation in the UK was provided by large international companies who were experienced and
knowledgeable about regulatory systems around the world. They were able to compare
regulatory systems and by identifying the uncertainties present in each system, and modelling
investments they were able to expose the problems within each system.
28
Summarising and evaluating the actors’ imaginaries
In order to summarise and evaluate the actors’ imaginaries, we deployed the PC framework as
illustrated in figure 1. This framework provides a convenient template with which to review the
positions of the actors, or their topoi, as termed in the PC literature. In our use of the PC/CPE
frameworks, we treat the concepts of topoi and the imaginary as interchangeable. The concept of
the imaginary may be a purely descriptive one, but the application of the PC framework
introduces a more evaluative dimension based on criterion of practical validity (Nørreklit, 2011).
In this section the actors are represented by their topoi, which characterise their rhetorical stance
(Nørreklit, 2011, Nørreklit et al., 2006).
The generators topoi are shown in figure 4. Their view of reality is multi-dimensional, and so
not as simplistic as suggested by figure 1. They are profit making or wealth maximising, but also
take into account an international strategic position that is often affected by their country of
origin, which they typically view as their core market. They also have strong engineering
traditions, which may lead to a conflict between profit making and engineering excellence. These
factors lead to a paradoxical situation that although the IA models featured very strongly in the
language of negotiation with the regulators, they were not necessarily decisive in guiding actual
investment decisions in which the wider values and goals of the organisation played a significant
role. One example of this is Iberdrola Renewable who aim to be the largest renewable company
in the world, on their web site they state:
IBERDROLA, S.A. is Spain’s number one energy group and the fourth largest utility company
in the world by market cap. A company with a 107-year history and roots in hydroelectric power,
IBERDROLA, S.A. employs over 33,000 people in more than 40 countries and has placed the
environment and sustainable development at the center of its global strategy.”
(www.iberdrolarenewables.us)
29
Although the narratives in the published documents could simply be the public mantra of the
board of directors, many of the employees of this company who were interviewed supported the
claim that sustainable development was part of their wider values and did indeed have a
significant role to play when making these decisions. For example, the statement on page 25 (by
the business services director) and 26 (a station manager) were both made by employees who
worked for Iberdrola. The Head of Environment added:
At the end of the day it’s really a gut feeling I think . . . as to whether a particular
station wishes to be in the market and I think you can do as much of a dance as
you like but unless you’ve got the confidence that, that, plant is going to run long
term or for as long as you need it to run, then you’re going to come with a little
decision. So I’m not sure it’s always going to be a pure NPV today, it’s always a
big question of well what’s the gut feeling?
Figure 5 The generators topoi
30
The government’s topoi is shown in figure 5. Their view of reality is multi-dimensional but
there is a lack of integration between the various dimensions leading to elements of illusion. In
particular, the government underestimated the ability of international suppliers to “sit on their
hands” when faced with immense technological and input price uncertainties; such that the
guaranteed output price does not offer them returns that are high enough to warrant new
investment.
.
Figure 6 The UK government’s topoi
Conflicting goals and regulatory impotence
The motives of the two main regulatory bodies were deeply contradictory. The Environment
Agency (EA) was solely focused on environmental targets as shown in figure 6. These targets
31
were, to some extent, separated from the security of supply issues representing a contradiction
between the concerns of EA and Ofgem. As an Environmental Manager explained:
There’s been a slight conflict between the regulators, one of their (Ofgem) prime
motives has been supporting their consumer and therefore making electricity
cheaper and that, it continues to be a motive. . . particularly as we’ve experienced
in the last sort of eighteen months where affordability of everything is seen as
being a big issue, people’s incomes are under pressure.
Figure 7. The Environment Agency regulator’s topos
The generators emphasised to politicians their inability to make long terms investment
decisions while consulting on the process for the framework of the LCPD; they asserted the need
for a more secure energy policy. However, at the start of this project, it was difficult to establish
policy because Ofgem denied that future security of supply was an issue; their main concern was
to ensure that consumers achieved low prices. As a Head of Operations critiqued:
32
I think the Government have questions to face, and they should be facing them
now . . . you can’t drive down prices from the point of view of Ofgem, the
Government and public perceptions. I call it my mother-in-law test, my motherin-law will look at Company B and say you guys make billions but you’re asking
us for more, that’s ridiculous, but she doesn’t see actually the billions we make is
not enough money to build. We need more than the billions we have if we’re
going to have to develop a new gas plant, put all the environmental stuff into the
existing coal plant and sustain that and develop a nuclear capability.
The impotence of the regulators with respect to ensuring new investment was emphasised by
a Station Manager who stated:
The regulators, Ofgem, have no legal back up to make us invest. The legal
requirement for generators to ensure security of supply was removed through
privatisation. Of course, Ofgem can play around with the market structure to
encourage investment but, so far, they have avoided this because both they and
the government believed investment would be market led. This has not worked,
market led investment will only work with a strong policy in place.”
This impotence did not seem to be recognised by Ofgem themselves who stated that their remit
was as follows:
Protecting consumers is our first priority. We do this by promoting competition,
wherever appropriate, and regulating the monopoly companies which run the gas
and electricity networks. The interests of gas and electricity consumers are their
interests taken as a whole, including their interests in the reduction of greenhouse
gases and in the security of the supply of gas and electricity to them.”
(www.ofgem.gov.uk)
Although this quotation suggests that the regulators have authoritative power over the
generators to ensure a regular supply of electricity, under the current market system, this power
was an illusion. As Ofgem’s website stated, they could take action when a company breached the
terms of their licence, acted anti-competitively or breached consumer protection law but ‘Failure
to make investments’ was not governed by any of those sanctions.
33
Figure 7. Ofgem’s topos
The generators, while advising on the LCPD, were also lobbying for radical changes to the
market structure, for example, wanting ‘capacity payments’ or some form of guarantee of prices.
A capacity payment would be a payment made to a generator to ensure the potential for
generation is in place. A capacity payment would be made to the generators regardless of
whether they ran a plant or not. In other words, it represented a contingency plan for security of
supply.
The government’s and hence the regulators’ view of reality was very dependent on science, in
the sense that their regulatory stance is based on scientific predictions about the future, especially
the possibility of human induced climate change. This paper does not intend to enter the climate
change debate but in terms of the regulatory topos, the ‘facts’ underpinning the regulatory
34
position are based on scientific models of the future. As will be discussed later, the government’s
topoi contains elements of illusion, partly because of its ideological commitment to market
solutions and partly because of conflicts between its objectives (e.g. security of supply versus a
green agenda).
4. Capital budgeting as a mediating and negotiating instrument
As argued earlier, capital budgeting is both a calculative technique, and a ‘model’ that mediates
between actors (Miller & O’Leary, 2007). The mediating role of IA in a regulated electricity
generating industry is shown schematically in figure 8. Net present value is shown as the
outcome of revenues (price x quantity); costs affected by generating technology and energy
costs; and the discount rate that varies according to business risk. The UK government wants to
guarantee supply and uses a pricing mechanism to incentivise private suppliers. The regulators
impact is on cost, as they expect the chosen technologies to reflect concerns about pollution and
CO2 emissions. Meanwhile, the generators want positive NPVs. This model is very simple as it
does not capture issues of uncertainty, the strategies of multinational companies, or how a
discourse involving DCF10 can trap negotiators and rule out conceptually simple solutions. As
well as being a mediating instrument, the figure may also be seen as an economic imaginary
(Jessop, 2013), established to negotiate the problem in terms of a standard NPV model with
revenues (positive cash flows), costs (negative cash flows) and discount rates. The narrow focus
and stark simplicity of the calculative process offers a fair representation of actual negotiations,
in which the government can only try to persuade the generators to invest by guaranteeing a price
that is high enough to produce the required return in relation to the risks. From the generators
perspective, the NPV calculation is part of a wider process of strategic development. In the
35
context of a strategic control perspective of capital budgeting (Miller & O’Leary, 2007), the
NPV model is not driving the generators’ strategy but rather functions as a boundary system
(Simons, 1995).
In the UK’s privately owned yet regulated industry, company decision makers still seek to
realise conventional goals such as profit or share-holder value whilst constrained by regulatory
rules on pricing and, in the case of electricity generation, choice of technology. In this setting
capital budgeting practices function as mediating devices (Miller & O’Leary, 2007) in two ways.
First, they link the science and economics of electricity generation with the generators own topoi
(Nørreklit, 2011). Secondly, they link the science and the economics in a negotiation space
between the generators, the government and the regulators. In this second form of mediation, the
interventionist role of capital budgeting practices means that these practices are not only about
linkages and communication; indeed, IA models with a set of implicit prices, industry outputs
and associated technologies lie at the centre of the negotiating framework.
36
Figure 8 -The investment appraisal model in relation to industry players
Applying the CPE and PC frameworks
The relationship between the CPE and PC frameworks is that whilst the latter evaluates the
practical validity of the actors’ imaginaries/topoi, the former offers a relatively explicit
relationship between semiotics and power, or the ‘fit between imaginaries and real, or potentially
realisable, sets of material interdependencies in the economy and its embedding in wider sets of
social relations’ (Jessop. 2013, p. 8). The dominance of a particular imaginary, such as that illustrated
in Figure 8, does not imply that it is either the best or the only imaginary available to us. Certainly,
from a negotiating perspective, the IA imaginary awards generators with both expertise and power
(French & Raven, 1959). The UK government is dependent on generators’ expertise to provide
new generating capacity. In return, the government can offer guaranteed prices and potentially
exercise coercive power in the face of non-compliance with regulations. However, as shown
above, in negotiations on environmental compliance, the regulators are very dependent on the
37
expertise of the regulators. Privatisation led to a loss of scientific capacity under the control of
the UK state, particularly in the area of nuclear energy. The IA model links science and the
economy (Miller& O’Leary, 2007) but the balance of influence has been heavily weighted on the
side of the generators.
In figure 3 we presented the government’s topoi as containing elements of illusion, because of
failures to integrate different elements of reality. In terms of CPE, it would seem that the topoi is
actually comprised of two quite contradictory imaginaries: in one imaginary, the NPV model, the
economy leads the science. In opposition, there is an alternative green agenda where the science
leads the economy. This contradiction is elaborated and enacted by the topoi of the regulators as
summarised in figures 6 and 7. Of the two regulators, the EA is valid in the sense of integration
between the different elements even if the individual components such as the facts and the logics
are based on contestable scientific models. In comparison with Ofgem, the EA also has an
unambiguous goal as set out in the recent Energy Act (2010). In contrast, Ofgem’s objective of
protecting the consumer seems ambiguous. In terms of logics, however, Ofgem quite
unambigously embraced the conventional investment appraisal models which help to align it
with the economic imaginaries of the generators. Given these fundamental contradictions and
illusions, policy paralysis was an unsurprising outcome.
As touched on at the outset of this paper, a further, key reason for inaction in terms of underinvestment arises out of uncertainty (Haka, 2007). Uncertainty can incorporate many issues such
as long term pricing, market instabilities and future polices. Some of the uncertainties of
generators in terms of making long term investment decisions includes the unknown nature of
future price curves and, more significantly, unknown future revisions of regulation and energy
policy. Yet these uncertainties are themselves contingent on the discourse and specific focus on
38
investment appraisal. In short, the IA discourse ruled some solutions in (guaranteed prices) and
some solutions (such as direct public investment) out.
But why was direct public investment ruled out? Not only has it been the preferred mode in
diverse countries such as China and France, it was the method adopted in the pre-privatisation
era in the UK. Although as Miller (1991) showed there was some notional use of IA techniques
in the UK generating industry in the pre-privatisation era, key decisions on the mode and
location of power stations were made primarily according to political and engineering logics, not
financial ones.
The CPE perspective offers a way of responding to the question as to why public investment
has been ruled out. In CPE, any given position is influenced by both semiotic and material
factors. In this paper we have focused on a particular semiotic phenomenon; the economic
imaginary of IA and the environmental imaginary of climate change and pollution. It is much
harder to identify those material factors that are likely to be masked by alternative imaginaries
(Jessop, 2013). The modern capitalist state is a curious contradictory mix of state and private
capital expenditure. Consider that, in the 1930s, the UK state put unemployed workers to work
building lidos, which not only provided employment but were useful amenities for the whole
population for a number of decades. In contrast, in 2012, the UK state can find billions of pounds
to build Olympic stadia with limited legacy potential at the height of an overall construction
boom. And now, as a new recession drags on, the UK state spends billions on welfare driven by
high unemployment but it cannot (will not?) build power stations. The prohibition is clearly not
on state spending per se but on spending that might lead to something that is “useful”. In short,
the state cannot be seen to be “productive” because that would subvert the central role of private
capital.
39
Jessop (2013) argues that new solutions and new imaginaries will necessarily emerge from
crises. However, noting the persistence of neo-liberal ideologies some years after the Great
Financial Crisis of 2008, Jessop’s CPE suggests that the material interests of global capital seem
to be able to resist and reject alternative narratives with ease. In terms of electricity generation,
the predicted crisis is one of blackouts and power cuts. Yet in countries such as the USA, with a
long history of regulated private utilities, electrical power cuts have not led to calls for regulatory
changes but to fundamental changes regarding the presumption of private supply (Weare, 2003).
From a CPE perspective with its roots in classical political economy (Tinker, 1980; Cooper
&Scherer, 1984), crises have a very distinct characteristics defined not by electricity black outs
but rather by a fall in the rate of profit and/or threats to the private ownership of the means of
production (Miliband, 1969).
In the UK context, an extra regulatory layer could be added to the environmental regulators
described above which reinforce the restriction on state action. Governments in the EU are
subject to rules concerning state help to industry which make severely constrain both direct
investment or (re)nationalisation. Thus calls for a reversal of the privatisation movement in the
UK (Milne, 2013) have to recognise that however “statist” it appears to be, the EU ultimately
protects the interests of private capital.
Conclusions
Building on the work of Miller (1991) and Miller & O’Leary (2007), the paper shows that the
prescriptive calculative techniques of investment appraisal may be used as negotiating
instruments in a regulated industry setting. The paper draws on cultural political economy
(Jessop, 2013) and pragmatic constructivism (Nørreklit et al., 2006) to interpret and evaluate an
40
empirical study of the UK electricity generating industry in terms of constructed imaginaries and
actor-realities. Under pressure to change its technology to meet environmental demands on
pollution, the generators raised the possibility of an investment hiatus leading to power cuts and
black-outs. The papers shows that the normative model of investment appraisal plays a
discoursal role as it frames the negotiations between the actors in a way that limits the apparent
choices available to policymakers. In addition, the discourse of crisis associated with black outs
hides a suspicion that the generators would, in their own terms, define crisis in terms of falling
rates of profit or threats to private property rights. On its part, the UK state’s freedom of action is
not only constrained by the hegemonic discourse of IA but is also limited by rules that restriction
on state action by members of the European Union.
One of the supreme ironies that emerge from this paper is that whilst it is not clear to what
extent the actors who actually make investment decisions actually based their investment
decisions on the theoretically approved IA techniques, the political, economic and regulatory
debates were framed by the language of rates of return and discount rates. Although it is clearly
in the interests of the regulators to link the issues of pricing and investment which the IA models
do so neatly, it is less clear why the other players have failed to question the underlying logics.
Although we have argued that discourse matters, we do not claim that all action is driven purely
by the semiotics. One of the strengths of the theoretical and methodological frameworks of CPE
and PC is that semiotics and materiality both matter. In the case of the UK electricity industry,
the semiotics have not been forced to change in response to changes in material circumstances. A
crisis of power cuts and black outs has been imagined but the political and economic impact of
this doomsday outcome is uncertain leaving the regulatory issues unresolved.
41
This study reveals another paradox and puzzle. Regulators seem to pay more attention to the
long term predictions of manmade global warming than they do to the much shorter term
predictions of power black outs. It is beyond the scope of this paper to resolve the puzzle and
explain why scientific imaginaries that link global warming to human carbon emissions seem to
carry more weight than the more near-term consequences of under-investment in generating
capacity predicted by the economic imaginaries. In terms of future research, the methodologies
introduced in this paper could be applied to try to explain these puzzling differences.
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Endnotes
1
Scottish Power is owned by Iberdrola a Spanish based company. The name Scottish Power is
retained in the UK for branding reasons.
2
Topos is Greek for ‘place’ and is the singular form: topoi is the plural
3
Within the context of this study sustainability refers to both the ability to achieve the
environmental targets set by both the European Union (EU) and the United Kingdom (UK), but
also the ability for the generation capacity to meet the demand.
4
See appendix 1 for a detailed explanation of method and data collection
5
This is now part of the Industrial Emissions Directive (IED), at the time of data collection it
was known as the PPC then the IPPC – to be consistent with the interview data it will be referred
to as the PPC permit.
6
Security of supply in the energy industry refers to the ability to produce enough electricity to
cover demand and any expected and unexpected maintenance projects throughout the GRID.
7
Many of these publications were published by the likes of JEP and AEP
8
Section 36 is the planning application for new power stations, governed through The Planning
Act 2008 (as amended by The Localism Act 2011). The applications are considered by the
Planning Inspectorate and recommendations given to DECC.
9
At the time the interviews took place the estimated cost of all investment was predicted to be
£200billion, the government prediction at 16th October 2013 was £110billion.
10
The terms NPV and DCF are used interchangeably since the first is just a particular form of
the latter. Any textbook distinctions between NPV and IRR are not relevant to the rhetorical
usage of investment appraisal models.
46
Appendix 1
Data collection stages and method
Data
collection
– stage
Method
Notes
Time
period
Stage one:
Initial
consultation with
industry experts to
identify industry
hot topics.
• Initial
unstructured
interviews
• Attending
industry
conferences
• Collection of
White Papers
and public
presentations
All
methods
included collecting
data
from
consultants,
analysts,
generators
and
regulators.
2006
Stage three:
Stage two:
Gaining technical understanding Collecting LCPD documentation –
of the regulations.
regulation applications.
•
•
•
Attending industry
conferences
Informal discussions with
industry experts
Collecting EU directives
•
•
•
Conferences attended included
‘Kyoto – at what price?’ London
June 2006 and ‘Implementing EC
emissions directives’, Germany,
November 2006. Stakeholders
included in informal discussions
include regulators, associations,
generators, Transmission team,
Trade
Unions,
consultants,
analysts, trainers.
2006-7
Unstructured interview with
Strategic Environmental Officer
of EA
Physical visits to some regional
EA offices to collect information
Virtual collection of some
documentation from the EA
regional offices who operated in
this form.
The interviews were necessary to
establish which stations had opted in
and out - at this stage there was no
publicly
available
information.
During the collection stage, it became
apparent that each regional office had
requested different information and
some had used documents as their
personal libraries, resulting in much
of the information not being
available. Therefore, this was a
limitation of the data collection
process.
2008-9
47
Data
collection
– stage
Method
Stage four:
Stage five:
Stage six:
Secondary
data Primary data collection on Triangulation of information
collection
on industry
background
and
industry background current
decision
making
process
• Collection of
• Semi-structured
• Attendance of two key industry
White Papers
interviews with actors in
conferences, The Energy
the industry who had
Forum Annual Conference,
• Collection of
knowledge ranging from
London, Oct 2010 and 2011.
historical
6-40 years spent in the
studies on the
• Industry debate, Institute of
industry.
industry
Directors led by Professor
Dieter Helm, London, Oct
2011.
Notes
This
collection
process
included
industry
and
academic sources.
Time
period
2009
Companies
interviewed
included the likes of Scottish
Power, International Power
PLC, Drax, RWE Npower,
Credit Sites, E.on, UK,
Environment Agency.
Interviewees were established
through contacts made at
previous industry conferences,
initial interview stages and cold
calling. Letters were sent out
via email and followed up via
telephone conversation.
2009-10
Attendance was twofold; first, to
gain new knowledge about the latest
White Paper and second to
triangulate the information gained in
stage five, with the knowledge of
CEOs from the big top six energy
companies and regulators. Key
informants included the Minister of
State, and actors within Scottish
Power,
International
Power,
Accenture,
KPMG,
Powerfuel,
Mainstream Renewable Power,
Costain, Citigroup, EDF, PWC.
2010-11
48