Economies of scale and technical change in electricity production in Ireland

Abstract

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 inputs, 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 quantification of 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.