The Impact of Liberalization on the Production of Electricity in Japan: Stochastic Frontier Analysis

Miyuki Taniguchi

doi:10.4236/ojapps.2014.44016

Abstract

This study aims to measure the impact of liberalization on the efficiency of electricity production in Japan using Stochastic Frontier Analysis (SFA). In addition, this study also aims to examine whether or not economies of scale exist in the electricity generation sector and the transmission sector, and whether or not economies of scope exist between electricity generation and transmission. Since 1995, liberalization of the electricity market in Japan has been phased in and regulations on entry have been relaxed three times. One motivation for these regularity changes has been to improve the efficiency of electricity production by introducing competition. Using a panel data set on the nine main power companies in Japan over the period 1970-2010, estimates of fixed-effects and stochastic frontier models of the cost function are obtained and compared. Estimates of the cost function show that liberalization has improved cost efficiency when both frontier models and non-frontier models are estimated. Estimates of the fixed-effects model are used to calculate economies of scale and economies scope because the data support the fixed-effects model. Economies of scope are found to exist for all nine power companies, while overall economies of scope declined in the 1970s and have improved little by little since the 1980s.

Highlights

Inefficiencies in the Japanese electricity market have been the focus of some attention
This study aims to measure the impact of recent liberalizations on the efficiency of electricity production in Japan, and to examine whether or not economies of scope exist between electricity generation and transmission
Since the mean of the estimates of SCP12 for each power utility is negative, these results suggest that economies of scope exist between the generation sector and tranmission sector for electricity on average

Summary

Introduction

Inefficiencies in the Japanese electricity market have been the focus of some attention. Goto and Inoue (2012) measure the economies of scope between generation and transmission in Japan to examine the effectiveness of diversification in the Japanese electricity industry [3]. This study aims to measure the impact of recent liberalizations on the efficiency of electricity production in Japan, and to examine whether or not economies of scope exist between electricity generation and transmission. To estimate either a production function or a cost function, papers in the literature use either a parametric approach or a non-parametric approach. Papers using a non-parametric approach typically employ Data Envelopment Analysis (DEA) to measure the inefficiencies among the electricity companies. Papers using DEA measure either productive efficiencies or cost efficiencies, using the variables which are the same as the variables to estimate either the production function or cost function

Objectives

Methods

Results

Conclusion