Operational Efficiency Improvements in the Portuguese Electricity Sector

Abstract

Efficiency has long been an issue of concern in the electricity sector. Most existing studies relate technical efficiency in electricity generation to policy factors while that in transmission and distribution is associated with environmental factors. Although firm operation is also a relevant perspective on this topic, its explicit impact upon technical efficiency has rarely been studied. In order to analyze the evolution and operational determinants of productive and cost efficiency in the Portuguese electricity sector (including generation from different sources, trade, transmission and distribution), this study estimates Stochastic Frontier models using firm-level panel data from 2006 to 2019, covering the period of liberalization of the Portuguese electricity market. The evidence is consistent with the expectation on efficiency gains from the market reform. However, such improvement is likely to slow down and needs to be consolidated. Results on the inefficiency determinants suggest that it is possible to improve productive technical efficiency by encouraging investment in fixed assets, higher average hourly wage and moderate average working hours. JEL classification: D24, L23, O25, Q40