Economies of Scale and Technical Change in Electricity Production in Ireland

Knowledge of the structure of production in public-utility enterprises is of considerable economic importance. Such things as the nature and extent of returns to scale and returns to individual factor imputs, the degree of substitutability between inputs, and the extent of allocative inefficiency and X-inefficiency may have bearings on various issues at the plant, firm and industry levels. For example, the nature and extent of returns to scale are known to have important implications for, amongst other things, investment policies in growing industries and the institutional arrangements necessary to achieve an optimal allocation of resources (Nerlove 1963, p. 167). But of course, whatever the particular concern, the formulation of precise policy prescriptions or appraisals requires suitable quantificationof the production structure at the appropriate level. The main purpose of this paper is to analyse the structure of production in the Irish electricity supply industry at the level of the individual thermal generating station. Such an analysis has not previously been carried out for Ireland, despite the abundance and availability of good-quality data; but various econometric studies of the electric-power industry have been reported for several other countries, and most of these have made use of some explicit production function. This production function approach is adopted here. More specifically, the study is based on the use of the so-called non-homothetic Leontief production function which was developed recently by Lau and Tamura (1972). The prime objective is to estimate the parameters of this function using pooled cross-section and time-series data, and to assess its adequacy as a description of the thermal electricity generation process at the plant level. A second objective is to use the estimated parameters to investigate certain matters which may be of relevance and interest to policy-makers, such as how the scale of the plant affects the quantities used of each of four major inputs, namely, capital, fuel, energy and labour; how variations in the intensity of the use of the plant affect the quantities of inputs used; and whether and how the pattern of technical change in plants has affected the use of individual inputs. The analysis includes explicit testing of hypotheses concerning the homotheticity of the production structure, the constancy of returns to scale, and the existence and Hicksian neutrality of embodied and disembodied technical progress. It is hoped that such an econometric analysis will provide a useful supplement to the considerable amount of engineering and other information on electricity generation at plant level. In addition to the econometric analysis, the paper contains a small amount of background material. Section 2 contains a brief sketch of the Irish generation system and the electricity production process; the latter may be viewed as providing the essential rationale for the choice of production function. Section 3 contains a brief outline of the relevant earlier econometric research on electricity production, and a general account of the nonhomothetic Leontief production function and its properties. Section 4 reports the