Abstract
Electricity prices on the European market have decreased significantly over the past few years, resulting in a deterioration of Swiss hydropower firms’ competitiveness and profitability. One option to improve the sector’s competitiveness is to increase cost efficiency. The goal of this study is to quantify the level of persistent and transient cost efficiency of individual firms by applying the generalized true random effects (GTRE) model introduced by Colombi et al. (Journal of Productivity Analysis 42(2): 123–136, 2014) and Filippini and Greene (Journal of Productivity Analysis 45(2): 187–196, 2016). Applying this newly developed GTRE model to a total cost function, the level of cost efficiency of 65 Swiss hydropower firms is analyzed for the period between 2000 and 2013. A true random effects specification is estimated as a benchmark for the transient level of cost efficiency. The results show the presence of both transient as well as persistent cost inefficiencies. The GTREM predicts the aggregate level of cost inefficiency to amount to 21.8% (8.0% transient, 13.8% persistent) on average between 2000 and 2013. These two components differ in interpretation and implication. From an individual firm’s perspective, the two types of cost inefficiencies might require a firm’s management to respond with different improvement strategies. The existing level of persistent inefficiency could prevent the hydropower firms from adjusting their production processes to new market environments. From a regulatory point of view, the results of this study could be used in the scope and determination of the amount of financial support given to struggling firms.
Highlights
Ever since Switzerland’s electrification at the beginning of the 20th century, hydropower has been the country’s main domestic source of electricity
Microeconomic theory demands the cost function to be increasing in generated electricity and input prices
Note: This table presents the economies of density and scale when using estimates of the true random effects model (TREM) and generalized true random effects model (GTREM) frontier models
Summary
Ever since Switzerland’s electrification at the beginning of the 20th century, hydropower has been the country’s main domestic source of electricity. Swiss hydropower firms have consolidated their position as reliable, cost effective and renewable base and peak load electricity producers. Hydropower has enabled Switzerland to play an active role on the European electricity market. The pursued business models can roughly be summarized as follows: run-of-river plants produce base load electricity while storage and pump-storage plants use their natural water inflows to help covering electricity demand at peak hours, usually occurring at noon and early evening. All three technology types produce for the domestic market, and are extensively involved in exporting activities to the European grid.
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
