The capital budgeting process and the energy trilemma - A strategic conduct analysis
Introduction
Encouraging the right type of investment is essential to the success of any energy policy. Suitable investments would maintain low prices, achieve reductions in emissions, and keep the lights on (Warren, 2014). The World Energy Council has identified supply, pricing, and emissions as the three major global energy concerns, termed within the industry as ‘the energy trilemma’. However, establishing a suitable energy policy is subject to complex regulatory systems, which both impose controls on prices to consumers and set out environmental targets for companies. This can be specific to a particular country. In the energy industry, any type of change requires complicated discussions and debates with regulators, politicians and generators. Although the relative dominance of each group of actors varies across the world, each country faces a similar problem: how to balance the energy trilemma.
The energy trilemma is recognised as an urgent problem in Great Britain (GB),1 the geographical setting for this case study. It is urgent because energy prices for consumers rose during the main data collection period for the case study, 2006–2014 (DECC, 2014a2), while security of supply is an unresolved issue (OFGEM, 2012,3 Johnson, 2014, Grigorjeva, 2015, Yiakoumi & Rouaix, 2016, DBEIS, 2017 4). In 2011, the industry regulators acknowledged that the country's market energy structure was no longer fit for purpose (DECC, 2011), highlighting the distinct lack of significant new investment. According to DECC (2014b) the requirement for reduced emissions is the only component of the energy trilemma that is currently being achieved. This has led to public outrage, and questions over why such a crucial commodity such as electricity is apparently being irresponsibly managed (Inman, 2014; Morison, 2014). Appreciation of the significance of lack of investment is central to understanding the energy trilemma. As Falkner (2014, p. 188) argues, “energy is central to the survival and prosperity of human society”.
During the period covered by the study, the industry argued that the laissez-faire approach by the Government regarding investment in new power plants discouraged capital investment. We examine how senior managers at the electricity generation companies used accounting in communications with regulators and governments when seeking change. In particular, we investigate the extent to which senior managers used accounting techniques strategically during the implementation of the revised Large Combustion Plant Directive (LCPD). The LCPD is a European directive aimed at reducing nitrogen oxide (NOx), sulphur dioxide (SO2) and dust emissions to combat environmental problems such as acid rain. Their conduct was calculated both to transform the structures within which they had to work, and to change the conduct of others.
In response to the calls for studies which focus on the role of a knowledgeable agency in the analysis of strategic conduct (Coad, Jack and Kholeif, 2016; Englund, Gerdin, & Burns, 2011; Roberts, 2014), we focus on the roles of knowledgeable agents in using contradictory structures to generate conflict. We observed agents using their knowledge of those structures and the actions of others in a deliberate way. Agency concerns how they actively influence, motivate, start an argument or discussion, and whether outcomes are intended or unintended. As Stones has argued, conduct analysis examines how we feel when things are against us, in relation to established norms (Stones & Jack, 2016). The changes in this case study do not concern accounting systems but rather the accountability of investment decisions, thereby using strategic conduct to assess strategic behaviour. We will be drawing on Giddens' original Structuration Theory (ST) and building on Stones’ (2005) development of the knowledgeability of agency. This enables us to contribute to the development of structuration theory in accounting research by analysing how people use accounting to control and change others (Coad, Jack, & Kholeif, 2016). Therefore, our main themes are:
- 1)
How did the agents think about the context?
- 2)
How did the agents plan their conduct?
- 3)
What actions were taken using capital budgeting?
- 4)
What were the outcomes of actions based on knowledge?
The theoretical contribution emerging from the analysis and interpretation of the case study strengthens our understanding of how change can be accounted for using strategic conduct analysis. A principal criticism of Giddens’ ST is that it is often used to demonstrate how institutions become established and maintained, but not how structures and actions adjust over time. This is attributable to the underdeveloped epistemology of the original theory, and its concept of strategic conduct analysis. How particular agents draw strategically on their knowledge of structure and the conduct of others when they attempt to alter the knowledgeability and perspectives of other agents, shows how structures might become altered.
The remainder of this paper is structured as follows: Section 2 examines the capital budgeting literature; Section 3 introduces the methods employed within this case study research; Section 4 provides an overview of the theory; Section 5 describes the background to the environmental regulations imposed in the UK; Section 6 presents the case study; Section 7 is the discussion, and Section 8 provides the conclusion.
Section snippets
Literature
Investing in capital projects, such as power stations, is a complex process. Management accounting offers many numerical techniques that aid capital budgeting for decision-making in such projects. CIMA (2009)5 found that 60% of organisations use Net Present Value (NPV), 55% use the payback method, 43% use Internal Rate of Return (IRR) and 18% use the Accounting Rate of Return (ARR) for capital budgeting analysis. These are often referred
Theoretical framework
Giddens' work on ST provides a “comprehensive theoretical system which theorists love to interpret and contest” (Bryant & Jared, 2011, p. 12). However, it also offers an ontological orientation to social life that “has done better than any other (meta) theory available” (Bryant & Jared, 2011:12). Nevertheless, “structuration theory would be still more effective if it were made easier for researchers to move from ontology in general to substantive inquiries … what is missing from Giddens’ theory
Research method
To examine the role of capital budgeting against the backdrop of environmental regulations that impose uncertainties on decision makers, we present a longitudinal, narrative theorised case study spanning the period 2006 to 2017. The research instruments used to collect data for the case study were designed to include the collection of both primary and secondary data. Primary data comprises mainly semi-structured interviews7 and public focus groups with
Background
Before the UK electricity industry was privatised in 1990, the majority of investment in the UK energy market centred on the use of coal and oil (Warren et al., 2018). However, after privatisation, the 1990s witnessed a rush of new investments, relying on low-priced gas as the main fuel (Warren, 2014). Following the introduction of a new market structure in 2001,8
Case study
This case study is structured as follows: 1) how agents thought about the context surrounding the investment decision; 2) how the agents planned their conduct; 3) the actions that were taken using capital budgeting; and 4) other actions based on knowledge outcomes. We aimed to understand how the agents-in-focus thought about the context of the investment, their knowledge of the structures and how others would act during the process. The analysis shows what the agents felt when the policy
Discussion
It was exceptionally naive to believe that market-led investment would work without implementing a focused energy policy. The generators used this naivety to push for returns on the capacity payment scheme26
Conclusions
This case study has demonstrated how the strategic conduct of the generators included using accounting to produce change in the structure, knowledgeability and processes of the market. The case study also shows that the concept of a dialectic of control allowed generators within the electricity generation industry to demand reconstruction and revision of the market structure relative to investment. The paper also demonstrates how the Government and regulators were forced to take the concerns of
References (66)
- et al.
Management accounting as practice. Accounting
Organizations and Society
(2007) - et al.
Strategic capital investment decision-making: A role for emergent analysis tools? A study of practice in large UK manufacturing companies
The British Accounting Review
(2006) Conflicts between national regulatory cultures and EU energy regulations
Utilities Policy
(2011)- et al.
Business strategies and management accounting in response to climate change risk exposure and regulatory uncertainty
The British Accounting Review
(2017) - et al.
Uncertainty, irreversibility and the use of ‘rules of thumb’ in capital budgeting
The British Accounting Review
(2015) A structuration analysis of accounting systems and systems of accountability in the privatised gas industry
Critical Perspectives on Accounting
(2005)- et al.
Regulation and investment incentives in electricity distribution: An empirical assessment
Energy Economics
(2016) 'Bootstrapping': The investment decision-making process in small firms
The British Accounting Review
(2005)- et al.
Accounting for strategic investment decision-making under extreme uncertainty
The British Accounting Review
(2016) - et al.
Structuration theory in accounting research: Applications and applicability
Critical Perspectives on Accounting
(2014)