Technological innovation and cost efficiency of grid firms in China: Dual impact of climate uncertainty and regulation

Technological innovations are becoming increasingly important in the grid sector as it transitions to decarbonization and digitalization. However, the endogeneity of technological innovations, coupled with the lack of a comprehensive evaluation framework, complicates the accurate estimation of cost efficiency of grid firms. This study examines the relationship between technological innovations and cost efficiency of grid firms under heterogeneous regulatory environments and climate uncertainties. We employ a novel endogenous stochastic frontier approach, using a panel dataset of grid firms in China that addresses the issue of endogeneity. Our findings show that innovations contribute to reducing costs, and failing to consider endogeneity will lead to an underestimation of cost efficiency. Nevertheless, the impacts on cost efficiency differ between high-quality and low-quality innovations. The results confirm that the breadth of technological innovation has a negative effect on cost efficiency, which intensifies in long-term strategies but is diminished by climate uncertainty and market-oriented reforms. In addition, the regional analysis indicates that grid firms operating with limited resources and competing priorities must trade off multiple outputs, resulting in heterogeneous cost efficiency when considering technological innovations. These findings contribute to optimizing resource allocation for grid firms between conventional and innovative frameworks under regulation and climate uncertainties.