Productivity Analysis of U.S. Electricity Generation Kengjai Watjanapukka (Under the direction of C.A. Knox Lovell) 2 Outline • I. Introduction & Motivation • II. Productivity and Financial Performance Analysis • Analytical Framework • Data • Findings and Conclusion • III. Productivity and Environmental Externalities Analysis • Analytical Framework • Data • Findings and Conclusion 3 I. Introduction & Motivation • Why productivity? • Productivity is an important part of economic growth. • “Productivity is our economic destiny” (Sharpe, 2005): • productivity growth at 1%living standards double in 70 years. • productivity growth at 3%living standards double in 24 years. • Productivity contributes significantly to the economic well-being and quality of life. 4 I. Introduction & Motivation • Why electricity generation in the U.S.? • It plays a critical role in economic development. • Most everything we do now-a-days involves electricity. • Electricity is a very important energy source. • Demand for electricity is increasing and strongly related to GDP. • The U.S. accounts for the greatest share of global electricity generation demand.
Transcript
Productivity Analysis of U.S. Electricity Generation
Kengjai Watjanapukka(Under the direction of C.A. Knox Lovell)
2
Outline
• I. Introduction & Motivation
• II. Productivity and Financial Performance Analysis• Analytical Framework• Data• Findings and Conclusion
• III. Productivity and Environmental Externalities Analysis
• Analytical Framework• Data• Findings and Conclusion
3
I. Introduction & Motivation
• Why productivity?
• Productivity is an important part of economic growth.
• “Productivity is our economic destiny” (Sharpe, 2005):• productivity growth at 1%� living standards double in 70 years.• productivity growth at 3%� living standards double in 24 years.
• Productivity contributes significantly to the economic well-being and quality of life.
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I. Introduction & Motivation
• Why electricity generation in the U.S.?
• It plays a critical role in economic development. • Most everything we do now-a-days involves electricity.• Electricity is a very important energy source.• Demand for electricity is increasing and strongly related to GDP.
• The U.S. accounts for the greatest share of global electricity generation demand.
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• The end of a natural monopoly• Many states in the U.S. began to deregulate
their electricity industry during early1990s :• separate generation (potentially competitive) from
transmission and distribution (natural monopoly)• privatize state-owned enterprises• create competitive wholesale and retail markets
I. Introduction & Motivation
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I. Introduction & Motivation• The deregulation of electricity generation
may lead to changes in new financial risks.Figure Figure Figure Figure 1111....1111: : : : Productivity and Financial Performance Productivity and Financial Performance Productivity and Financial Performance Productivity and Financial Performance
• What are the causes of this divergence between U.S. electric utility productivity and financial performance?
I. Introduction & Motivation
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• The electricity generation is also the largest industrial polluter in the U.S.
• Sulfur dioxide (SO2)• Nitrogen oxides (NOx)
• Carbon dioxide (CO2)
I. Introduction & Motivation
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I. Introduction & MotivationFigure 1.2: U.S. Electric Utility Contribution to Total Emissions, 2002
• Electric utility sector accounts for the largest of SO2 and CO2 and the second largest of NOxemissions in the U.S.
• SO2 and NOx emissions cause acid rain
• CO2 emissions cause global warming
• SO2 and NOx are subject to the environmental regulation, but not CO2
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I. Introduction & Motivation
• How to measure productivity in presence of environment externalities in a way that provides a closer approximation to its effect on society’s well-being?
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I. Introduction & Motivation
• Most of previous productivity researches focus on the effects of environmental regulations (especially in SO2 emissions).• Find a negative impact of environmental regulation
on productivity change.
• None of the previous productivity studies• has taken account of ALL the environment
externalities (from electricity generation) into their analysis of productivity change, or
• has tried to relate productivity change to financial performance change.
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I. Introduction & Motivation
• This dissertation focuses on 2 objectives:1) to examine the linkage between productivity
change and financial performance change to see how• financial performance change can be attributed to
change in productivity in electricity generation, • what economic drivers have contributed to productivity
change, or • This will benefit an electric utility to improve productivity
and ability to compete and make profit.
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I. Introduction & Motivation
2) to measure productivity in presence of environment externalities that can more closely maps productivity changes into social welfare changes.
• compare the estimated productivity changes that including environmental externalities to that excluding them.
• derive shadow prices of environmental externalities, which are generally unpriced.
• It is useful for economists, regulators and policy makers to have unbiased policy recommendations.
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II.1. Productivity and Profit Model
• The 3-stage decomposition of profit change of Grifell-Tatjé and Lovell (1999).
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II.1. Productivity and Profit Model
• I modify the model of Grifell-Tatjé and Lovell (1999)• output orientation � input orientation
• the Laspeyres indexes of quantity change and the Paasche indexes of price change � the Bennet price and quantity indicators.
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II.1. Productivity and Profit Model
• In the first-stage,
quantity effect
price effect.
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II.1. Productivity and Profit Model
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II.1. Productivity and Profit Model
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II.1. Productivity and Profit Model
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II.1. Productivity and Profit Model
• In the third-stage,
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scale effect
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II.3. Data
• The data set is obtained from the Annual Report of Major Electric Utilities, License and Others (FERC Form 1).• a balanced panel of 8 years (1994 – 2001)• Two level data (plant & utility)
• 234 electric generating plants• 57 electric utilities
• one output (electricity generation) and three inputs (capital, labor and fuel)
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II.3. Data
Utility= [Total salaries and wages] ÷÷÷÷ [Total
number of employees]$ /YearWlAverage Annual Salary
Plant=Fuel burned expense ÷÷÷÷ Fuel burned$
/MMBtuWfAverage Cost of Fuel Burned
Plant
= [Cost of plant: land and land right + structures and improvements +
• Profit of U.S. electric utilities declines from year to year due to the negative• price effect (the major contributor), • activity effect, and • operating inefficiency effect.
• The increase in productivity effect from year to year is attributed to technology progress.
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III. Productivity & Environmental Externality
• Productivity is defined as the ratio of the outputs produced to the inputs used. • can be estimated by either of 2 approaches:
• the index number method and • the production frontier approach.
• Unlike the index number method, the production frontier framework does not require price information.
• Because environmental externalities are generally not marketed (no market prices),
• � the production frontier approach is used in my research to avoid measurement and evaluation difficulties.
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III. Productivity & Environmental Externality
• The production frontier approach can be extended to analyze rates of productivity change by using the Malmquist index (MPI) method.
• The input-oriented MPI index is defined as),,,,,( 111 +++ tttttt
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III. Productivity & Environmental Externality
• The inclusion of the pollution vector Zt raises the question of whether Zt is treated as
• an output vector or
• an input vector • I treat the pollution vector as an input vector.
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III. Productivity & Environmental Externality
• I can also estimate the shadow prices of pollution by totally differentiating the input distance function.
• The Shadow Price of Emission, (Lovell, 2004),
• The shadow price of the kth pollution is interpreted as a measure of the marginal cost of abating pollution in term of foregone revenue from marketed output .
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III.1. Data
• Same variables from the FERC Form 1 as in the productivity and financial performance chapter.
• Emissions of SO2, NOx, and CO2 are included into the plant level data set • obtained from the EPA emission scorecard that is available
during the years of 1995-2001.
• An unbalanced panel of 7 years (1995 – 2001) • for the quantity data
• 204 plants operating during 1995 – 1999, • 196 plants in 2000 and • 195 plants in 2001
Conventional Inclusive SO2 Inclusive SO2, Nox and CO2
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III.2. ResultsFigure 4.4: Shadow Prices of SO 2 Emissions and Actual Prices of SO 2 Allowances, 1995 – 2001
0
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1995 1996 1997 1998 1999 2000 2001
Year
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III.2. Conclusion
• To measure productivity in presence of environment externalities that more closely map the productivity change and the society well-being change, all the environmental externalities should be included into the measurements of productivity.
