IDEAS home Printed from https://ideas.repec.org/a/gam/jeners/v14y2021i12p3436-d572641.html
   My bibliography  Save this article

Modelling Efficiency of Electric Utilities Using Three Stage Virtual Frontier Data Envelopment Analysis with Variable Selection by Loads Method

Author

Listed:
  • Pavala Malar Kannan

    (Faculty of Management, Multimedia University, Cyberjaya 63100, Selangor, Malaysia)

  • Govindan Marthandan

    (Faculty of Management, Multimedia University, Cyberjaya 63100, Selangor, Malaysia)

  • Rathimala Kannan

    (Faculty of Management, Multimedia University, Cyberjaya 63100, Selangor, Malaysia)

Abstract

Electric utility regulators and policy makers implement incentive-based regulation to improve electric utilities efficiency or to manage the cost of electricity. However, poorly implemented regulation may produce undesired results such as low reliability or poor quality of service. Moreover, the competition within the electricity sector is likely to be low because of the high barriers to entry, vertically integrated electric utilities, and high capital requirements. Therefore, benchmarking exercises allow policy makers and regulators to gauge the relative efficiency of electric utilities and help them to reward or penalize the electric utilities accordingly. In this study, we examined the variables that significantly influence the efficiency of electric utilities and developed an optimum method to measure the efficiency of the electric utilities. The results of the efficiency measurement were then used to rank the electric utilities. The result of this study indicates that there are 13 variables that significantly affect the efficiency score of electric utilities and three stage virtual frontier data envelopment analysis (3S-VF-DEA) is the optimum method to measure the efficiency of the electric utilities.

Suggested Citation

  • Pavala Malar Kannan & Govindan Marthandan & Rathimala Kannan, 2021. "Modelling Efficiency of Electric Utilities Using Three Stage Virtual Frontier Data Envelopment Analysis with Variable Selection by Loads Method," Energies, MDPI, vol. 14(12), pages 1-21, June.
    • Handle: RePEc:gam:jeners:v:14:y:2021:i:12:p:3436-:d:572641
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/1996-1073/14/12/3436/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/1996-1073/14/12/3436/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Tooraj Jamasb & Manuel Llorca & Pavan Khetrapal & Tripta Thakur, 2018. "Institutions and Performance of Regulated Firms: Evidence from Electric Utilities in the Indian States," Working Papers EPRG 1809, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
    2. Giannakis, Dimitrios & Jamasb, Tooraj & Pollitt, Michael, 2005. "Benchmarking and incentive regulation of quality of service: an application to the UK electricity distribution networks," Energy Policy, Elsevier, vol. 33(17), pages 2256-2271, November.
    3. Li, Hongkuan & He, Haiyan & Shan, Jiefei & Cai, Jingjing, 2019. "Innovation efficiency of semiconductor industry in China: A new framework based on generalized three-stage DEA analysis," Socio-Economic Planning Sciences, Elsevier, vol. 66(C), pages 136-148.
    4. Pereira de Souza, Marcus Vinicius & Souza, Reinaldo C. & Pessanha, José Francisco M. & da Costa Oliveira, Carlos Henrique & Diallo, Madiagne, 2014. "An application of data envelopment analysis to evaluate the efficiency level of the operational cost of Brazilian electricity distribution utilities," Socio-Economic Planning Sciences, Elsevier, vol. 48(3), pages 169-174.
    5. See, Kok Fong & Coelli, Tim, 2014. "Total factor productivity analysis of a single vertically integrated electricity utility in Malaysia using a Törnqvist index method," Utilities Policy, Elsevier, vol. 28(C), pages 62-72.
    6. Kuosmanen, Timo & Saastamoinen, Antti & Sipiläinen, Timo, 2013. "What is the best practice for benchmark regulation of electricity distribution? Comparison of DEA, SFA and StoNED methods," Energy Policy, Elsevier, vol. 61(C), pages 740-750.
    7. Torstein Bye & Einar Hope, 2005. "Deregulation of electricity markets : The Norwegian experience," Discussion Papers 433, Statistics Norway, Research Department.
    8. Jindal, Abhinav & Nilakantan, Rahul, 2021. "Falling efficiency levels of Indian coal-fired power plants: A slacks-based analysis," Energy Economics, Elsevier, vol. 93(C).
    9. Khodadadipour, M. & Hadi-Vencheh, A. & Behzadi, M.H. & Rostamy-malkhalifeh, M., 2021. "Undesirable factors in stochastic DEA cross-efficiency evaluation: An application to thermal power plant energy efficiency," Economic Analysis and Policy, Elsevier, vol. 69(C), pages 613-628.
    10. H. Fried & C. Lovell & S. Schmidt & S. Yaisawarng, 2002. "Accounting for Environmental Effects and Statistical Noise in Data Envelopment Analysis," Journal of Productivity Analysis, Springer, vol. 17(1), pages 157-174, January.
    11. Sueyoshi, Toshiyuki & Goto, Mika, 2012. "Efficiency-based rank assessment for electric power industry: A combined use of Data Envelopment Analysis (DEA) and DEA-Discriminant Analysis (DA)," Energy Economics, Elsevier, vol. 34(3), pages 634-644.
    12. Jie Wu & Qingyuan Zhu & Pengzhen Yin & Malin Song, 2017. "Measuring energy and environmental performance for regions in China by using DEA-based Malmquist indices," Operational Research, Springer, vol. 17(3), pages 715-735, October.
    13. Charnes, A. & Cooper, W. W. & Rhodes, E., 1978. "Measuring the efficiency of decision making units," European Journal of Operational Research, Elsevier, vol. 2(6), pages 429-444, November.
    14. Gouveia, M.C. & Dias, L.C. & Antunes, C.H. & Boucinha, J. & Inácio, C.F., 2015. "Benchmarking of maintenance and outage repair in an electricity distribution company using the value-based DEA method," Omega, Elsevier, vol. 53(C), pages 104-114.
    15. Sueyoshi, Toshiyuki & Goto, Mika, 2011. "Operational synergy in the US electric utility industry under an influence of deregulation policy: A linkage to financial performance and corporate value," Energy Policy, Elsevier, vol. 39(2), pages 699-713, February.
    16. Haney, Aoife Brophy & Pollitt, Michael G., 2013. "International benchmarking of electricity transmission by regulators: A contrast between theory and practice?," Energy Policy, Elsevier, vol. 62(C), pages 267-281.
    17. Nataraja, Niranjan R. & Johnson, Andrew L., 2011. "Guidelines for using variable selection techniques in data envelopment analysis," European Journal of Operational Research, Elsevier, vol. 215(3), pages 662-669, December.
    18. Shuttleworth, Graham, 2005. "Benchmarking of electricity networks: Practical problems with its use for regulation," Utilities Policy, Elsevier, vol. 13(4), pages 310-317, December.
    19. Nepal, Rabindra & Jamasb, Tooraj, 2015. "Incentive regulation and utility benchmarking for electricity network security," Economic Analysis and Policy, Elsevier, vol. 48(C), pages 117-127.
    20. Mohsin, Muhammad & Hanif, Imran & Taghizadeh-Hesary, Farhad & Abbas, Qaiser & Iqbal, Wasim, 2021. "Nexus between energy efficiency and electricity reforms: A DEA-Based way forward for clean power development," Energy Policy, Elsevier, vol. 149(C).
    21. Çelen, Aydın & Yalçın, Neşe, 2012. "Performance assessment of Turkish electricity distribution utilities: An application of combined FAHP/TOPSIS/DEA methodology to incorporate quality of service," Utilities Policy, Elsevier, vol. 23(C), pages 59-71.
    22. Mirza, Faisal Mehmood & Rizvi, Syed Badar-Ul-Husnain & Bergland, Olvar, 2021. "Service quality, technical efficiency and total factor productivity growth in Pakistan's post-reform electricity distribution companies," Utilities Policy, Elsevier, vol. 68(C).
    23. Barros, C.P. & Wanke, Peter & Dumbo, Silvestre & Manso, Jose Pires, 2017. "Efficiency in angolan hydro-electric power station: A two-stage virtual frontier dynamic DEA and simplex regression approach," Renewable and Sustainable Energy Reviews, Elsevier, vol. 78(C), pages 588-596.
    24. Cui, Qiang & Li, Ye, 2015. "Evaluating energy efficiency for airlines: An application of VFB-DEA," Journal of Air Transport Management, Elsevier, vol. 44, pages 34-41.
    25. Alizadeh, Reza & Gharizadeh Beiragh, Ramin & Soltanisehat, Leili & Soltanzadeh, Elham & Lund, Peter D., 2020. "Performance evaluation of complex electricity generation systems: A dynamic network-based data envelopment analysis approach," Energy Economics, Elsevier, vol. 91(C).
    26. Cambini, Carlo & Croce, Annalisa & Fumagalli, Elena, 2014. "Output-based incentive regulation in electricity distribution: Evidence from Italy," Energy Economics, Elsevier, vol. 45(C), pages 205-216.
    27. Shrivastava, Naveen & Sharma, Seema & Chauhan, Kavita, 2012. "Efficiency assessment and benchmarking of thermal power plants in India," Energy Policy, Elsevier, vol. 40(C), pages 159-176.
    28. Haney, A.B. & Pollitt, M.G., 2012. "International benchmarking of Electricity Transmission by Regulators: Theory and Practice," Cambridge Working Papers in Economics 1254, Faculty of Economics, University of Cambridge.
    29. Hemphill Ross C. & Meitzen Mark E. & Schoech Philip E., 2003. "Incentive Regulation in Network Industries: Experience and Prospects in the U.S. Telecommunications, Electricity, and Natural Gas Industries," Review of Network Economics, De Gruyter, vol. 2(4), pages 1-22, December.
    30. Anna Ter-Martirosyan & John Kwoka, 2010. "Incentive regulation, service quality, and standards in U.S. electricity distribution," Journal of Regulatory Economics, Springer, vol. 38(3), pages 258-273, December.
    31. Lowry, Mark Newton & Getachew, Lullit, 2009. "Statistical benchmarking in utility regulation: Role, standards and methods," Energy Policy, Elsevier, vol. 37(4), pages 1323-1330, April.
    32. Llorca, Manuel & Orea, Luis & Pollitt, Michael G., 2014. "Using the latent class approach to cluster firms in benchmarking: An application to the US electricity transmission industry," Operations Research Perspectives, Elsevier, vol. 1(1), pages 6-17.
    33. Mark Andor & Frederik Hesse, "undated". "A Monte Carlo Simulation comparing DEA, SFA and two simple approaches to combine efficiency estimates," Working Papers 201177, Institute of Spatial and Housing Economics, Munster Universitary.
    34. Ryna Yiyun Cui & Nathan Hultman & Morgan R. Edwards & Linlang He & Arijit Sen & Kavita Surana & Haewon McJeon & Gokul Iyer & Pralit Patel & Sha Yu & Ted Nace & Christine Shearer, 2019. "Quantifying operational lifetimes for coal power plants under the Paris goals," Nature Communications, Nature, vol. 10(1), pages 1-9, December.
    35. Jamasb, T. & Pollitt, M., 2000. "Benchmarking and regulation: international electricity experience," Utilities Policy, Elsevier, vol. 9(3), pages 107-130, September.
    36. Tone, Kaoru, 2001. "A slacks-based measure of efficiency in data envelopment analysis," European Journal of Operational Research, Elsevier, vol. 130(3), pages 498-509, May.
    37. Iparraguirre, José Luis & Ma, Ruosi, 2015. "Efficiency in the provision of social care for older people. A three-stage Data Envelopment Analysis using self-reported quality of life," Socio-Economic Planning Sciences, Elsevier, vol. 49(C), pages 33-46.
    38. Núñez, F. & Arcos-Vargas, A. & Villa, G., 2020. "Efficiency benchmarking and remuneration of Spanish electricity distribution companies," Utilities Policy, Elsevier, vol. 67(C).
    39. Blacconiere, Walter G. & Johnson, Marilyn F. & Johnson, Mark S., 2000. "Market valuation and deregulation of electric utilities," Journal of Accounting and Economics, Elsevier, vol. 29(2), pages 231-260, April.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ogunrinde, Olawale & Shittu, Ekundayo, 2023. "Efficiency and productivity of renewable energy technologies: Evidence from U.S. investor-owned utilities across regional markets," Utilities Policy, Elsevier, vol. 82(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Sueyoshi, Toshiyuki & Yuan, Yan & Goto, Mika, 2017. "A literature study for DEA applied to energy and environment," Energy Economics, Elsevier, vol. 62(C), pages 104-124.
    2. Nepal, Rabindra & Jamasb, Tooraj, 2015. "Incentive regulation and utility benchmarking for electricity network security," Economic Analysis and Policy, Elsevier, vol. 48(C), pages 117-127.
    3. Yuan, Peng & Pu, Yuran & Liu, Chang, 2021. "Improving electricity supply reliability in China: Cost and incentive regulation," Energy, Elsevier, vol. 237(C).
    4. Llorca, Manuel & Orea, Luis & Pollitt, Michael G., 2016. "Efficiency and environmental factors in the US electricity transmission industry," Energy Economics, Elsevier, vol. 55(C), pages 234-246.
    5. Ogunrinde, Olawale & Shittu, Ekundayo, 2023. "Efficiency and productivity of renewable energy technologies: Evidence from U.S. investor-owned utilities across regional markets," Utilities Policy, Elsevier, vol. 82(C).
    6. Yao, Xin & Huang, Ruting & Du, Kerui, 2019. "The impacts of market power on power grid efficiency: Evidence from China," China Economic Review, Elsevier, vol. 55(C), pages 99-110.
    7. Patyal, Vishal Singh & Kumar, Ravi & Lamba, Kuldeep & Maheshwari, Sunil, 2023. "Performance evaluation of Indian electricity distribution companies: An integrated DEA-IRP-TOPSIS approach," Energy Economics, Elsevier, vol. 124(C).
    8. Mirza, Faisal Mehmood & Mushtaq, Iqra, 2022. "Estimating the marginal cost of improving services quality in electricity distribution utilities of Pakistan," Energy Policy, Elsevier, vol. 167(C).
    9. Tsutsui, Miki & Goto, Mika, 2009. "A multi-division efficiency evaluation of U.S. electric power companies using a weighted slacks-based measure," Socio-Economic Planning Sciences, Elsevier, vol. 43(3), pages 201-208, September.
    10. Andor, Mark A. & Parmeter, Christopher & Sommer, Stephan, 2019. "Combining uncertainty with uncertainty to get certainty? Efficiency analysis for regulation purposes," European Journal of Operational Research, Elsevier, vol. 274(1), pages 240-252.
    11. Ajayi, Victor & Anaya, Karim & Pollitt, Michael, 2022. "Incentive regulation, productivity growth and environmental effects: the case of electricity networks in Great Britain," Energy Economics, Elsevier, vol. 115(C).
    12. Luis Orea & Tooraj Jamasb, 2017. "Regulating Heterogeneous Utilities: A New Latent Class Approach with Application to the Norwegian Electricity Distribution Networks," The Energy Journal, , vol. 38(4), pages 101-127, July.
    13. Waidelich, Paul & Haug, Tomas & Wieshammer, Lorenz, 2022. "German efficiency gone wrong: Unintended incentives arising from the gas TSOs’ benchmarking," Energy Policy, Elsevier, vol. 160(C).
    14. Mai, Nhat Chi, 2015. "Efficiency of the banking system in Vietnam under financial liberalization," OSF Preprints qsf6d, Center for Open Science.
    15. Chen Lin & Sanford Berg, 2008. "Incorporating Service Quality into Yardstick Regulation: An Application to the Peru Water Sector," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 32(1), pages 53-75, February.
    16. Saastamoinen, Antti & Kuosmanen, Timo, 2016. "Quality frontier of electricity distribution: Supply security, best practices, and underground cabling in Finland," Energy Economics, Elsevier, vol. 53(C), pages 281-292.
    17. Andor, Mark A. & Parmeter, Christopher & Sommer, Stephan, 2019. "Combining uncertainty with uncertainty to get certainty? Efficiency analysis for regulation purposes," European Journal of Operational Research, Elsevier, vol. 274(1), pages 240-252.
    18. Zhengxiao Yan & Wei Zhou & Yuyi Wang & Xi Chen, 2022. "Comprehensive Analysis of Grain Production Based on Three-Stage Super-SBM DEA and Machine Learning in Hexi Corridor, China," Sustainability, MDPI, vol. 14(14), pages 1-21, July.
    19. Leme, Rafael C. & Paiva, Anderson P. & Steele Santos, Paulo E. & Balestrassi, Pedro P. & Galvão, Leandro de Lima, 2014. "Design of experiments applied to environmental variables analysis in electricity utilities efficiency: The Brazilian case," Energy Economics, Elsevier, vol. 45(C), pages 111-119.
    20. Elvira Silva & Pedro Macedo & Isabel Soares, 2019. "Maximum entropy: a stochastic frontier approach for electricity distribution regulation," Journal of Regulatory Economics, Springer, vol. 55(3), pages 237-257, June.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gam:jeners:v:14:y:2021:i:12:p:3436-:d:572641. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.