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

Mydland, Ørjan
Doctoral thesis
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URI
https://hdl.handle.net/11250/2640857
Date
2018-12
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  • Doctoral Dissertations (FOR) [37]
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.

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