Academic journal article National Institute Economic Review

The Electricity Supply Industry: A Study of an Industry in Transition

Academic journal article National Institute Economic Review

The Electricity Supply Industry: A Study of an Industry in Transition

Article excerpt

Michela Vecchi [*]

In 1989 the UK began a process of transferring an almost wholly state-owned electricity supply industry (ESI) into a collection of privately-owned generation, transmission and distribution utilities. Using data from 1960-97, this paper aims to evaluate how the performance of the UK ESI has changed over time and to compare the UK performance with France, Germany and the United States in order to assess the impact of the liberalisation process. The study takes a whole industry approach, combining the four aspects of electricity production - generation, transmission, distribution and supply. The computation of labour and total factor productivity and the impact on consumer prices are used to shed light on how successful the various industry structures have been in raising performance.

Industry structure in electricity supply

Introduction

In recent years many countries have initiated reforms to their Electricity Supply Industries (ESI). This process has been driven both by the technology of the industry and by economic considerations, as well as political motivations. Technological developments have made it feasible for small generators to produce electricity efficiently. Liberalisation of the electricity market is expected to result in important efficiency gains, by achieving a better co-ordination of resources, and reduction in costs and prices. Also, since the Single European Act of 1987, the European Commission has been committed to the implementation of the liberalisation of the network industries. The 1997 European Electricity Directive prescribes common rules for the progressive liberalisation of the national electricity markets within the EU.

The United Kingdom is in the vanguard of this process (Pollit, 1995). The privatisation and restructuring of the ESI, which began in 1989, involved a number of changes to the operation of the industry, the most recent of which is the introduction of competition in the supply of electricity to final consumers in 1999. The primary purpose of this paper is to benchmark the UK ESI against practice abroad and its own previous performance in order to evaluate the impact of the reforms on productivity and prices. Hence, the UK industry is compared to the ESI in Germany, France and the United States, thus evaluating relative efficiency in four countries with very different market structures/regulatory regimes over the period 1960 to 1997. In particular we measure growth in total factor productivity (TFP) over time in the four countries and benchmark relative productivity levels at points in time. This will allow us to shed light on how successful the various industry structures have been in raising performance.

The project takes a whole-industry approach, combining the four aspects of electricity production - generation, transmission, distribution and supply. Previous econometric studies examining the impact of industrial structure and regulation on efficiency tended to compare plants engaged in similar activities, such as generation in plants using similar types of fuel (see for example Pollitt, 1995, 1996; Zeitsch and Lawrence, 1996). But the performance of the ESI depends also on the production strategies pursued in total so that these studies tend to miss out companies engaged simultaneously in generation and transmission/distribution. For example very few studies consider the position in the vertically integrated ESI in France or Germany but, as will be shown below, important lessons can be learned from a consideration of electricity production in these two countries.

The following section presents the main features of the structure of the industry, discussing recent changes that have characterised the operation of the ESI in the four countries. We then describe the methodology used to evaluate labour productivity and TFP and we briefly discuss the data used in the empirical analysis. More detail on methodology and data sources can be found in a larger report underlying this paper (O'Mahony and Vecchi, 2000). …

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