Essays on efficiency and economies of scope and scale in electricity networks

Abstract

The electricity market in Norway has undergone substantial changes in recent decades, which prompts the need for research on how the industry should be organized. In an indivisible electricity industry that, on the one side, consists of market-oriented competitive entities in production and power trading, and, on the other side, natural monopolies within transmission and distribution, it is of interest to perform cost analysis within the productivity and efficiency framework. The electricity industry is complex, owing to the fact that production and consumption must happen simultaneously. After the Energy Act of Norway came into force on January 1, 1991, only transmission and distribution remained regulated. The regulation of transmission and distribution serves to avoid the typical disadvantages arising from natural monopolies. Many countries have gone through the same or similar changes in their respective industries. In a developing and increasingly global industry regarding power trading, more regulation is probably needed, not less. The possible future changes in the power grid—owing to private firms and the ability of households to take advantage of the technological developments in solar and wind generation—will probably also affect the regulating task in the future. The main objective of this thesis is to improve the understanding of efficiency measures and methods, and to increase the knowledge of the market structure in the Norwegian electricity distribution industry. In Essay 1 “Economies of scale in Norwegian electricity distribution: A quantile regression approach”, we investigate scale economies to see if the structure of the industry affects the costs. If a restructure of the industry would reduce costs for the firms, and, hence, in the industry, it would mean increased productivity and efficiency. In Essay 2, “Economies of Scope and Scale in the Norwegian Electricity Industry”, we study scale and scope economies. Economies of scope measures the synergies of producing more than one output. Some electricity companies in Norway both generate and distribute electricity. If there exist some positive synergies from producing more than one output, it means that the cost would be higher if two separate firms produced the same amounts of output of each product as the one firm producing both products. In Essay 3, “Lost economies of scope and potential merger gains in the Norwegian electricity industry”, I investigate what are the potential gains from merging the distribution companies in Norway. Both Essay 1 and Essay 2 state that there are economies of scale in the industry, meaning that the industry would benefit from increasing the size of the companies in terms of increased output. Because the output is given, this means that companies must merge. In Essay 2, we report that there exist economies of scope. Due to the change in the Energy Act of Norway in 2016, we find that the separation of the integrated firms producing both generation and distribution services, would increase costs to the industry and, hence, incur losses by not utilizing economies of scope. If disentangling generation and distribution of electricity would lead to more mergers of the distribution companies, it is of interest to seek the potential gains in terms of cost reductions to the industry from such mergers. In Essay 4 “Disentangling Costs of Persistent and Transient Technical Inefficiency and Input Misallocation: The Case of Norwegian Electricity Distribution Firms”, we focus on the fact that many efficiency studies neglect allocative efficiency, and only concentrate on technical efficiency. In addition, we also disentangle costs of persistent and transient inefficiency, and include determinants for both persistent and transient inefficiency.