Effects of Regulatory Governance on Indian Thermal Power Efficiency: Results from a Stochastic Frontier Modeling

Abstract

This paper tests the impact of institutional quality on the performance of thermal power sector in India. We estimate a translog inefficiency effects stochastic frontier model using plant age, plant capacity and an index of regulatory governance as determinants of inefficiency. The dataset comprises a panel of 77 coal-based thermal power plants during the period 1994-95 to 2010-11. The mean technical efficiency is 76.7% which means there is wide scope for efficiency improvement in the sector. However, this is 4% points higher than previous estimates which measured productivity up to the year 2001-02. Results are robust to various model specifications and regulatory governance positively impacts plant performance. While technical efficiency is highly sensitive to unbundling of state electricity boards, it is not impacted significantly by the experience of regulators. The policy implication is that the quality of regulatory capacity and experience need to be enhanced for the desired sectoral performance.