Chapter 5: Analysis – the role of investment appraisal, signification
5.8 De-coupled and missing frames of reference
The interviews demonstrated that the investment appraisal had been decoupled from the environmental appraisal required by the regulator. Three frames of reference were required to support the three factors within the paradox of the UK generation industry, one for the environment, one for the shareholders and one for the security of supply.
However, the frame of reference for the security of supply no longer existed because there was no real energy policy informing the generators of future investments. The government seems to have presumed that striving for profit maximisation would be sufficient to guarantee investment to be market led. However, the generators realised that the main institutional shareholders do not currently visualise the generation industry as high risk, and that they prefer low risk investments. Following the new legislation,
167 which highlighted the lack of a strong energy policy, it became apparent that there were higher risks involved, which the returns could not support.
The remaining two frames of reference: the environment and the shareholders can be linked directly to financial theory and regulations, when modelling. Although both frames of reference were used, they had become decoupled, because the permits for the regulation did not require any financial evidence unless the generator was not using BAT.
Giddens (1984) argues that the structural principles that a group of actors rely heavily on are founded on the knowledge of the actors themselves. When the actors act upon these structural principles they become institutionalised in practice; this has occurred in regards to the constant use of investment appraisal techniques. It is not the requirements of the regulators that form the basis of this institution, it is the experience of past investments that have shaped the ‘norms’ of decision making; therefore, it is an unconscious process in which the actors recognise that the structures are not perfect. In fact, these techniques are similar to a guessing game; however, this game is accepted and the generators continue to re-enact this process because it provides a good mode of communication. The IA communication process is one which is accepted as a standard process amongst all the actors involved.
Investment appraisal has its place in the time-space continuum through its repeated use in business plans that are presented to boards of directors. In this case, the structure becomes both the impetus and the result of the action, demonstrating the ‘duality of structure’ in action. The use of investment appraisal was embedded within the structural principles of this industry before this research began. However, investment appraisal techniques were not used solely to make the decisions (the decision making process
168 was more complicated than that) in this case it was used to identify the unknown variables. These variables were then subject to a process of lobbying to make the modelling more realistic. At industry conferences, the modelling was demonstrated to show how small changes to future regulations could impact not only on the financial outcomes of projects but also the security of supply; thus engaging politicians in a serious debate on the security of supply.
To summarise, based on Giddens’ duality of structure in this study:
Structure
Modality Interaction
Figure 12 Signification conclusion from the framework
5.7 Conclusion
This chapter has analysed the UK generation industry, using Giddens’ ST. The focus of this chapter was to provide the reader with the findings related to the frames of reference within the context of
Interpretive scheme
Communication
Signification
What frame of reference is used when making investment
decisions?
Theory of profit, rates of return, portfolio
requirements, LCPD directive, and PPC regulation.
Business plans including investment appraisal, PPC applications.
The frame of reference relating to both the shareholders’ needs and environmental protection were used, although uncoupled, butno frame of reference for security of supply existed.
169 implementation of the LCPD within the UK generation industry. It is apparent that at the time of the interviews, and when the decisions relating to the LCPD were made, two frames of reference were dominant; investment and regulation. However, to provide informative investment appraisal models information regarding regulation, investment and sustainability were all required.
The frame of reference for regulations were used at a general level for the PPC application. The frame of reference for regulation was then designed in the UK, by the generators and regulators. It was here that IA was used first as a mediating device. IA applied the general principles of the LCPD directive and tested them using existing knowledge (theory), reproducing them to examine the consequences. The IA models created a workable methodology to evolve a regulatory framework. Although the rules were eventually agreed upon, following intense lobbying, the regulation frame of reference continued to be re-enacted, through the application process. The application process for the permits required under this regulation was de-coupled from the modelling of the investment decisions themselves.
The normative IA techniques / framework of reference had been deeply embedded within this industry since privatisation in the 1990s. This was the main frame of reference when communicating decisions were used to lobby politicians in order to create grounded arguments to inform future policy decisions that could be centred on sustainability. The frame of reference relating to sustainability was the one missing item. Although there were nominal White Papers, they represented little value for the industry. Long term investments require long term policies, the set of White Papers produced during the ten year period running up to the LCPD decisions contained a lot of information without committing to any one item. The lack of policy created a void in the modelling of investment appraisal techniques.
170 Earlier in this chapter the process of using the frames of reference in conjunction with the ‘norms’ established through a legitimisation process was considered. The next chapter will consider how legitimisation processes are established within this industry, what they are and what the missing rules and resources relating to sanctions might be, which complicate the decision making process.
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