Measuring and decomposing economies of diversification: An application to biogas-fuelled cogeneration plants in Austria

Abstract

This paper investigates the existence and the degree of economies of diversification for small-scaled, renewable-fuelled cogeneration systems using 2014 cross-sectional data from 67 Austrian biogas plants. It is the first study applying the recently introduced concept of economies of diversification proposed by Chavas and Kim (2010), which is a generalization and decomposition of economies of scope. Economies of diversification are decomposed into three additive parts: a part measuring complementarity among outputs; a part reflecting economies of scale; a part reflecting convexity. In addition, this paper extends the decomposition introduced by Chavas and Kim (2010) in such a way that the contribution of each input to economies of diversification and its components can be investigated. The results indicate substantial cost savings from diversification. For very-small scaled plants (≤100 kWel) most of the cost savings come from scale economies. For larger plants (>250 kWel) positive complementarity and convexity effects are the main source of economies of diversification and outweigh the negative effect from scale diseconomies. In addition to substantial fuel/feedstock cost reductions, significant costs saving effects from the jointness in labour and other inputs positively contribute to the complementarity effect. While on average capital and labour costs positively contribute to economies of scale, feedstock costs work in the direction of diseconomies of scale.