Observed and unobserved heterogeneity in stochastic frontier models: An application to the electricity distribution industry

In this study we combine different possibilities to model firm level heterogeneity in stochastic frontier analysis. We show that both observed and unobserved heterogeneities cause serious biases in inefficiency results. Modelling observed and unobserved heterogeneities treat individual firms in different ways and even though the expected mean inefficiency scores in both cases diminish the firm level efficiency rank orders turn out to be very different. The best fit with the data is obtained by modelling unobserved heterogeneity through randomizing frontier parameters and at the same time explicitly modelling the observed heterogeneity into the inefficiency distribution. These results are obtained by using data from Finnish electricity distribution utilities and the results are relevant in relation to electricity distribution pricing and regulation.     

Divorce comes at a price: An ex ante welfare analysis of ownership unbundling of the distribution and commercial companies in the Dutch energy sector

Vertical unbundling in the electricity sector is a hot political topic in the European Union. The European Commission has decided that the ownership unbundling of transmission networks from other stages in the value chain is the most effective way to ensure fair network access and infrastructure investment. While this European unbundling debate has not ended yet and most countries still do not have an independent transmission system operator (TSO), the Dutch government has already taken one step further. In 2008, it decided that distribution companies should be completely separated from commercial activities that are part of the same holding (generation, trade and supply). This governmental decision has been fiercely debated. Although the goal is to improve competition as well as security of supply, these benefits are uncertain. Nevertheless, it is certain that ownership unbundling comes at a cost. In this paper we present an ex ante cost-benefit analysis of the Dutch unbundling act. We conclude that it is unlikely that this act is welfare enhancing: divorce comes at a price.     

Evaluating the regulator: Winners and losers in the regulation of Spanish electricity distribution

The principal aim of this study is to evaluate the regulation of electricity distribution in Spain. To this end, we begin by analyzing whether the changes introduced by the regulator led distribution companies to improve their efficiency; we then address whether the reimbursements paid to the distribution companies are linked to efficiency; lastly, we examine whether consumers benefited from the efficiency improvements. We focus on Spain because the electricity regulator in that country is a longstanding pioneer in the implementation of incentive-based regulatory models. Our analysis was implemented using the regulatory model proposed by Bogetoft (1997) as a benchmark. The results show that the Spanish electricity regulator did not establish a link between efficiency and the reimbursements paid to electricity companies; in addition, the electricity companies benefited to the detriment of consumers.     

International benchmarking and regulation: an application to European electricity distribution utilities

Due to a shortage of data and increased international mergers, national energy regulators are looking to international benchmarking analyses for help in setting price controls within incentive regulation. We present an international benchmarking study of 63 regional electricity distribution utilities in six European countries that aims to illustrate the methodological and data issues encountered in the use of international benchmarking for utility regulation. The study examines the effect of the choice of benchmarking methods using DEA, COLS and SFA models. We discuss what problems of international benchmarking are highlighted by the study and how they can be overcome.     

Measuring efficiency and productivity change in power electric generation management companies by using data envelopment analysis: A case study

This paper provides an empirical analysis of the determinants of energy efficiency in 32 power electric generation management companies over the period 2005-2009. The study uses non-parametric Data Envelopment Analysis (DEA) to estimate the relative technical efficiency and productivity change of these companies. In order to verify the stability of our DEA model and the importance of each input variable, a stability test is also conducted. The results of the study indicate that average technical efficiency of companies decreased during the study period. Nearly half of the companies (14) are below this average level of 88.7% for five years. Moreover, it is shown that the low increase of productivity changes is more related to low efficiency rather than technology changes.     

The effects of electricity reforms on productivity and efficiency of China's fossil-fired power plants: An empirical analysis

This paper investigates the effects of electricity reforms on productivity and efficiency of China's generation plants, based on the third industrial census data and the first economic census data. Partial factor productivity (PFP) analysis indicates that the productivity improvements in labor and capital inputs associated with the reforms are approximately 26% and 45% respectively. The effect of the reforms on fuel expense is weakly significant, but there is evidence of significant productivity improvement in fuel usage. Further total factor productivity (TFP) analysis shows that the efficiency gain from the reforms is still significant when the substitution effect of labor and capital inputs are considered, though the magnitude is much lower than that of the PFP analysis. The effect of the reforms on technical efficiency becomes weakly significant when fuel expense is further included in TFP analysis, but a significant positive effect is expected if fuel input is measured in physical quantity.     

Regulatory reforms and productivity: An empirical analysis of the Japanese electricity industry

The Japanese electricity industry has experienced regulatory reforms since the mid-1990s. This article measures productivity in Japan's steam power-generation sector and examines the effect of reforms on the productivity of this industry over the period 1978–2003. We estimate the Luenberger productivity indicator, which is a generalization of the commonly used Malmquist productivity index, using a data envelopment analysis approach. Factors associated with productivity change are investigated through dynamic generalized method of moments (GMM) estimation of panel data. Our empirical analysis shows that the regulatory reforms have contributed to productivity growth in the steam power-generation sector in Japan.     

Dynamics of productivity change in the Australian electricity industry: Assessing the impacts of electricity reform

The Australian electricity industry has undergone a significant reform, since the mid-1990s. Key changes comprised functional unbundling, market restructuring, regulatory reform, public corporatisation and privatisation. Technological development has been another indisputable constituent of these changes, in the wake of ICT revolution. The principle rationale behind these changes has been that they would improve productivity of the industry and social well-being of people. This paper examines the dynamics of productivity changes in the Australian electricity industry and conducts several hypotheses-testings to identify whether industry's efficiency measures are truly improved as a result of the reform-driven changes. Malmquist Total Factor Productivity Index approach and ANOVA are used for this purpose. The results reveal that the productivity gains in the industry have been largely driven by technological improvements and, to a lesser extent, by reform-induced comparative efficiency gains. On average at national level and for the entire industry, there are efficiency gains that, to large extents, can be attributed to functional unbundling and public corporatisation and, to a lesser extent, to market restructuring and privatisation. The results, however, reveal that the reform-driven changes have made insignificant contribution to comparative efficiency, at the level of thermal generation.     

Financial optimization in the Turkish electricity market: Markowitz's mean-variance approach

Electricity constitutes the input into many products that produced by industry and used by people. Hence, it can be considered as a product or service that has vital importance in human life and economy. Since it has such special properties of instantaneous production and consumption obligation and unfeasible storage, electricity market is not like other markets. In a competitive electricity market, generation company faces price risks and delivery risks. So that risk management is an important part of a generation company and can deeply effect companies’ profitability. This paper focuses on electricity generation asset allocation between bilateral contracts, such as forward contracts, and daily spot market, considering constraints of generating units and spot price risks. The problem is to find the optimal portfolio based on known electricity generation total costs, bilateral contract prices, it employed Turkish historical balanced market hourly system marginal and day-ahead hourly market prices between of 2006 and 2011. There are limited studies about portfolio optimization in electricity markets in literature and this paper should be considered frontier study taking spot market's hourly prices separately as risky assets. Markowitz mean-variance optimization which is claimed to be the beginning of modern portfolio theory in financial sector is used to demonstrate this approach. Mean-variance optimization has been successfully applied to all cases that modeled for electricity market. Some suggestions for future work are also listed in this paper.     

Profitability and productivity changes in the Korean electricity industry

The Korean electricity industry saw significant changes following the reform in April 2001. Until the last decade, the industry was monopolized by the Korea Electric Power Corporation (KEPCO), a state-owned, vertically integrated company. The 2001 reform divided KEPCO's power generation division into six power generation companies (GENCOs), with the aim of improving efficiency and introducing competition in the electricity industry. In this study, we used capital total factor productivity (KTFP) to analyze profit changes from fixed input capital, and an index number profit decomposition (INPD) to examine the sources of the profit changes. We investigate the industry thoroughly from three points of view: the overall industry over time; the power generation sector by company; and the transmission and distribution sectors of the Korea Electric Power Corporation (KEPCO). Next, we measured how the profits from productivity growth were distributed to consumers, fuel suppliers, employees, and company owners. The results suggest that a more reasonable price system for both wholesale and consumer prices needs to be implemented prior to the privatization and deregulation of the Korean electricity industry.     

The effect of merger and consolidation activities on the efficiency of electricity distribution regions in Turkey

In this study, we analyze the efficiency performances of Turkish electricity distribution companies throughout 2002 and 2009 in the stochastic frontier analysis (SFA) framework. Our more specific goal is to measure how the efficiency performances of the electricity distribution regions were affected by the mergers between distribution regions occurred in 2005. The results demonstrate that efficiencies of the companies serving to mostly the residential customers are higher than those of other companies. However, the positive impact of residential customers on the efficiencies decreased significantly following the mergers between electricity distribution companies. In contrast, the positive impact of higher customer density on efficiency also decreased, but insignificantly following the restructuring activities in the market in 2005. Our study also witnesses that the positive impact of the mergers on the efficiencies decreases as the proportion of sales to residential customers in regions increases. In contrast, the restructuring activities of 2005 increased equally the efficiencies of the companies serving in the regions with higher and lower customer densities.     

Efficiency and deregulation of the electricity market in Singapore

This study examines production efficiency of electricity generation in the New Electricity Market of Singapore (NEMS), where deregulation is currently proceeding. Singapore is reliant on foreign direct investments and exports so competition from countries with lower costs such as China and India is exerting pressure on the government to reduce the costs of doing business here. Electricity cost is one of these. Deregulation is believed to be able to bring about lower electricity costs due to the various efficiency gains possible. This study concerns itself mainly with production efficiency and attempts to calculate possible production efficiency gains by using linear programming model. Production-efficiency gains are quantified by the base case scenario of continued regulation versus four counterfactual deregulation scenarios. The results indicate that cost gains could be about eight per cent of current production cost, and this is possibly a lower-bound estimate. However, whether the purported efficiency gains are realized is to be seen as the deregulation proceeds.     

China's large-scale power shortages of 2004 and 2011 after the electricity market reforms of 2002: Explanations and differences

Since the electricity market reforms of 2002, two large-scale power shortages, one occurring in 2004 and one in 2011, exerted a tremendous impact on the economic development of China and also gave rise to a fierce discussion regarding electricity system reforms. In this paper, the background and the influence scale of the two power shortages are described. Second, reasons for these two large-scale power shortages are analyzed from the perspectives of power generation, power consumption and coordination of power sources and grid network construction investments. Characteristics of these two large-scale power shortages are then summarized by comparatively analyzing the performance and the formation of the reasons behind these two large-scale power shortages. Finally, some effective measures that take into account the current status of electricity market reforms in China are suggested. This paper concludes that to eliminate power shortages in China, both the supply and the demand should be considered, and these considerations should be accompanied by supervisory policies and incentive mechanisms.     

Market (in)efficiency in valuing electric utilities—The case of Norwegian generating companies

After deregulation of the energy market in Norway, a number of mergers and acquisitions of hydropower generating companies have taken place. However, valuation of these companies has proved controversial. From an ex-post perspective, there is support for the criticism that generation assets have been sold too cheaply. This article presents a simple valuation model providing evidence of how value has evolved. On the basis of these results, we discuss the valuation from an ex ante perspective and in the light of the market efficiency hypothesis of 15 and 16.     

The evolution and main determinants of productivity in Brazilian electricity distribution 1998–2005: An empirical analysis

This paper estimates changes in the productivity of the Brazilian electricity distribution sector using Data Envelopment Analysis (DEA) on a panel of 18 firms from 1998 to 2005. The study decomposes the productivity change of these distribution firms in terms of technical efficiency, scale-efficiency and technical progress. This exercise aims to help the understanding of the main determinants of the evolution of productivity, focusing its relationship with the restructuring process implemented in the 1990s. TFP index records a yearly positive growth rate of 1.3% in the whole period under analysis for all firms. Technical change was the main component behind this evolution, with an average growth of 2.1% per year, while technical efficiency presented a yearly negative performance of ? 0.8%. The results prove that, in general terms, the incentives generated in the reform process do not seem to have led the firms to behave in a more efficient manner.     

Divide and rule. The economic and legal implications of the proposed ownership unbundling of distribution and supply companies in the Dutch electricity sector

In Machiavelli's theory of power, the concept of ‘divide and rule’ forms the main theme: the ruler has absolute power and to maintain and increase such power all means are justified. When viewed against the background of this theory, the current debate in the Netherlands on the unbundling of energy (electricity, gas) companies can be observed as an example of ‘divide and rule’, in which the Dutch Minister of Economic Affairs plays a central role. Yet, contrary to Machiavelli in his time, the Dutch government does, in fact, aim principally at the greater welfare of the Dutch people. It is therefore noteworthy that, while important steps in the decision to unbundled have been taken, there is no evidence that the Dutch people will indeed benefit from the envisaged unbundling.     

Energy efficiency and the slump in labour productivity in the USA

Energy consumption is included in an aggregate Cobb-Douglas production function for the USA. The data suggest that energy conservation has not reduced the growth rate for real GNP by more than 0.3 percentage points and that less than one-fifth of the overall slump in labour productivity since 1973 should be attributed to higher energy prices.     

Targeting for energy efficiency and improved energy collaboration between different companies using total site analysis (TSA)

Rising fuel prices, increasing costs associated with emissions of green house gases and the threat of global warming make efficient use of energy more and more important. Industrial clusters have the potential to significantly increase energy efficiency by energy collaboration. In this paper Sweden’s largest chemical cluster is analysed using the total site analysis (TSA) method. TSA delivers targets for the amount of utility consumed and generated through excess energy recovery by the different processes. The method enables investigation of opportunities to deliver waste heat from one process to another using a common utility system.The cluster consists of 5 chemical companies producing a variety of products, including polyethylene (PE), polyvinyl chloride (PVC), amines, ethylene, oxygen/nitrogen and plasticisers. The companies already work together by exchanging material streams. In this study the potential for energy collaboration is analysed in order to reach an industrial symbiosis. The overall heating and cooling demands of the site are around 442 MW and 953 MW, respectively. 122 MW of heat is produced in boilers and delivered to the processes.TSA is used to stepwise design a site-wide utility system which improves energy efficiency. It is shown that heat recovery in the cluster can be increased by 129 MW, i.e. the current utility demand could be completely eliminated and further 7 MW excess steam can be made available. The proposed retrofitted utility system involves the introduction of a site-wide hot water circuit, increased recovery of low pressure steam and shifting of heating steam pressure to lower levels in a number heat exchangers when possible. Qualitative evaluation of the suggested measures shows that 60 MW of the savings potential could to be achieved with moderate changes to the process utility system corresponding to 50% of the heat produced from purchased fuel in the boilers of the cluster.Further analysis showed that after implementation of the suggested energy efficiency measures there is still a large excess of heat at temperatures of up to 137 °C.     

Measuring persistent and transient energy efficiency in the US

The promotion of US energy efficiency policy is seen as a very important activity. Generally, the level of energy efficiency of a country or state is approximated by energy intensity, commonly calculated as the ratio of energy use to GDP. However, energy intensity is not an accurate proxy for energy efficiency given that changes in energy intensity are a function of changes in several factors including the structure of the economy, climate, efficiency in the use of resources, behaviour and technical change. The aim of this paper is to measure persistent and transient energy efficiency for the whole economy of 49 states in the US using a stochastic frontier energy demand approach. A total US energy demand frontier function is estimated using panel data for 49 states over the period 1995 to 2009 using two panel data models: the Mundlak version of the random effects model (which estimates the persistent part of the energy efficiency) and the true random effects model (which estimates the transient part of the energy efficiency). The analysis confirms that energy intensity is not a good indicator of energy efficiency, whereas, by controlling for a range of economic and other factors, the measures of energy efficiency obtained via the approach adopted here are. Moreover, the estimates show that although for some states energy intensity might give a reasonable indication of a state’s relative energy efficiency, this is not the case for all states.     

AGA (Asset Governance Assessment) for analyzing affect of subsidy on MC (Marginal Cost) in electricity distribution sector

Nowadays subsidy payments on electrical energy have to be managed and controlled to prevent any side effect particularly in developing countries. Effects of some external factors on Energy consumption and electricity distribution indices are analyzed in this paper. External factors are classified into three categories of social behavior, governance and urban planning. MC (Marginal Cost) of electricity in distribution is considered as the main index to be analyzed. Also, ANN (Artificial Neural Network) is applied to simulate effect of the mentioned factors on MC of distribution sector. Numerical investigation on the indices for a sample DISCO (Distribution Company) in Iran is made, results indicate that the more subsidies are allocated to consumers the more MC is increased. AGA (Asset Governance Assessment), which is proposed as a kind of governance decision, could improve the performance efficiency and avoid lose of activities done by DISCOs through subsidy management.