Electricity sector liberalisation has coincided with a significant decline in R&D spending. This paper reviews the industrial organisation literature on R&D and innovation to explore the likely causes of the decline in R&D spending in the electricity sector. Meanwhile, R&D productivity and innovative outputs in utilities and equipment suppliers appear to have improved. However, a lasting decline in R&D expenditure can have a negative long-term effect on technological progress and innovation in the sector. We conclude that the decline in R&D could have been predicted from the literature. We also discuss the need to reorient the post-liberalisation technology policy.