Vertical Separation of Transmission Control and Regional Production Efficiency in the Electricity Industry

Abstract

This study investigates the divestiture of transmission control from vertically-integrated power producers, aimed to maintain non-discriminatory access of the transmission network. I ask whether the vertical separation is sufficient to enhance how efficiently production is allocated among generators (i.e., regional production efficiency). Using a difference-in-difference strategy, I compare the treated region, Southwest Power Pool (SPP), with a control region, where no restructuring activities were implemented. Based on robust empirical results, I fail to find significant market wide evidence of improvement in regional production efficiency associated with the vertical separation of transmission control. However, looking into subgroups of generators, I find mixed evidence of cost savings via reallocation of production resources: (1) coal units are dispatched more efficiently after the restructuring; (2) this is not true for two types of gas units with different combustion technologies and cost efficiency.

Operational Efficiency Improvements in the Portuguese Electricity Sector

“…Regulatory frameworks could stimulate innovation and therefore improve efficiency in the energy sector (European Commission, 2019;CEER, 2020aCEER, , 2020bACER, 2021). Evidence suggests that liberalizing policies can improve performance in the energy sector though various pathways: competition policy enforcement can exert a positive impact on productivity in the energy market (Duso et al, 2019); institutional reform and privatization have been associated with improvements in quality and efficiency in the Latin American Electricity Sector (Balza et al, 2013); deregulation provides incentives for agents to make careful investment decisions that are more consistent with the technological nature of (nuclear) power plants (Lei et al, 2017); regulatory independence improves electricity generation performance in India (Jindal and Nilakantan, 2022); privatization in the Swedish electricity distribution sector gave rise to efficiency gains (Lundin, 2020); electricity reform improved technical efficiency in Indian power distribution (Bobde and Tanaka, 2020); vertical separation of transmission network allows a more efficient allocation of resources and therefore cost savings (Chu, 2021); electricity price policies can affect the deployment of new technologies (Sinsel et al, 2020); technical efficiency was also considered an indicator of the effectiveness of regulatory regimes in the Norwegian electricity sector (Senyonga and Bergland, 2018); finally, the transition from a bilateral electricity market to a centralized auction market in Texas was found to help improve market efficiency and reduce cost (Brehm and Zhang, 2021).…”

Operational Efficiency Improvements in the Portuguese Electricity Sector

“…Both productive efficiency and cost savings are considered relevant when evaluating performance in the electricity sector (Lundin, 2020;Chu, 2021), and therefore either can be used to assess whether market reform is successful. As noted in the next section, various types of frontiers have been used for different purposes in energy economics studies: production frontier (Shao et al, 2016;Yang et al, 2018;Hou et al, 2020Hou et al, , 2021, distance frontier (Liu et al, 2019;Jin et al, 2021), cost frontier (Kang, 2018;Soroush et al, 2021), energy demand frontier (Zhang and Adom, 2018;Du et al, 2021) and Bayesian frontier (Kleit and Terrell, 2001;Makie la and Osiewalski, 2018;Haider and Mishra, 2021), among others.…”