Economies of scale in the Swiss hydropower sector

Abstract

The study considers the estimation of a translog cost function employing panel data for a sample of 43 Swiss hydropower companies, over the period of 1995 to 2002. The results of this analysis indicate the existence of economies of scale and density for most output levels. The basic novelty in this study is the estimation of a cost function for a sample of hydropower companies. In the economic literature, no study on the cost structure of the hydropower plants using an econometric approach has been published so far.

Notes

¹ The hydropower companies are approximately 80, whereas the nuclear power companies are five in number. The production of electric power using thermal power plants or using wind or photovoltaic energy is currently limited (∼4%).

² For a review of cost functions in the electric utility industry see Ramos-Real (2005).

³ The effect of this input price on cost is thus considered in the constant.

⁴ See Cornes (1992, p. 106).

⁵ A translog function requires the approximation of the underlying cost function to be made at a local point, which in our case is taken at the median point of all variables. Thus, all independent variables are normalized at their median point.

⁶ See, for a similar approach in modelling the cost structure in the electricity sector (Filippini, 1996, 1998).

⁷ No data were available which would allow the calculation of the capital stock using the perpetual inventory method.

⁸ For a discussion of this procedure see Greene (2003). The model has been estimated using the computer program LIMDEP 7.0.

⁹ See for a discussion on this issue Filippini (1996).

¹⁰ The variable DR1_PS does not appear in the table because it is taken as reference, in order to avoid the dummy variable trap.

¹¹ The inverse of cost elasticity of output is referred to by Chambers (1988), as the ‘economies of size, rather than economies of scale, which are defined in regard to production function. Scale and size economies are equivalent if and only if the production function is homothetic (Chambers, 1988, p. 72). Here, we do not impose this assumption. However, as for the purpose of this study we are more interested in the cost effects of output, we define the returns to scale in terms of cost elasticity.

¹² Equation 4 has been evaluated at the input prices, value of the capita stock of the median company.