Transcript Divestitures & Fuel Efficiency

Ownership Change, Incentives and Plant Efficiency:
The Divestiture of U.S. Electric Generation Plants
James Bushnell
UC Energy Institute
Catherine Wolfram
UC Berkeley
The Economics of Electricity Markets
June 2-3, 2005  Toulouse, France
Electric generating plant divestitures in the U.S.
•
The ownership of electric generating plants in the U.S. changed
dramatically between 1998 and 2001.
- Over 300 plants, representing nearly 20% of U.S. installed generating
capacity, changed ownership.
•
Divestitures were encouraged by state regulators as part of the
industry restructuring.
- Easy measure of stranded costs.
- Addressed concerns about the ability of a firm that was vertically
integrated into transmission to exercise market power.
•
Old owners (investor owned utilities) faced cost-of-service regulation;
new owners face market incentives.
Electricity industry restructuring and economic efficiency
•
There is heated debate in academic and policy circles about
how to design restructured markets.
•
All of this should be moot if restructuring doesn’t improve
economic efficiency.
•
Several academic and policy studies have examined the
effects of restructuring on cost efficiencies:
- Top down: DOE (2003), SEARUC (2003), CAEM (2004).
- Bottom up: Markiewicz, Rose and Wolfram (2004) looks at
changes in operating efficiency at IOU plants facing new
incentives; Kleit and Reitzes (2005) looks at dispatch
efficiency.
Measuring the effects of divestitures on plant efficiency
•
Ideally, we would like to evaluate changes in each plant’s total
factor productivity after divestiture.
•
Unfortunately, data on employment, maintenance and capital
inputs is not publicly available after divestiture.
- We’re exploring data availability from various sources.
•
For now, we’re analyzing whether fuel efficiency changed at
plants that were divested.
- Rich data are available from the Environmental Protection
Agency.
- Implicit assumption that production is Leontief in fuel and
other inputs.
There may be no effect of divestiture on fuel efficiency,
- A generating unit’s fuel efficiency is an immutable
technological characteristic.
- IOUs may have made poor investment decisions, but at least
they knew how to operate their own plants.
…or there may be either positive or negative net effects.
•
Heat rates could go up following divestiture.
- It will take the new owners some time to master the
idiosyncrasies of the plant.
- New owners may cycle the plants more (e.g. to exercise
market power) at the cost of higher heat rates.
•
Heat rates could go down following divestiture.
- IOUs had fuel adjustment clauses, so they didn’t do
everything possible to minimize heat rates.
- New owners might be able to renegotiate union contracts so
they can promote good operators.
Data set
•
We are analyzing electric generating units that are:
- Fossil-fuel fired (i.e. not nuclear or hydroelectric).
- Included in the EPA Continuous Emissions Monitoring System
data base.
- In regions where divestitures were prominent (this excludes,
for instance, all the plants in Florida).
•
We have hourly fuel input and output data on ~1000
generating units for 7 years (1997-2003).
We analyze plants in the shaded states.
Empirical specification
•
To analyze divestitures, we estimate versions of the following
equation:

ln(HRit )  f Divestitureit , ln(GrossLoadit ), tmonth ,iunit ,  it
•

for unit i in time period t, where
- HR is the unit’s heat rate (inverse of fuel efficiency),
- t is either monthly or hourly,
- Divestiture = 1 after divestiture (if applicable),
- t are month dummies, θi are unit dummies, and
- we specify the relationship between HR and Gross Load with
care.
Example of what we’re labeling a Divestiture effect.
Average Heat Rates for 2 units across 2 years
Unit
Divested
Year
1997
2003
14
12
Not
divested
Our Divestiture effect:
(12-14) – (10 -11) = -1
11
10
Our Divestiture effect in logs:
(ln(12)-ln(14)) –
(ln(10) –ln(11))  -.05
Our estimates control for:
- differences in average heat rate levels across
divested and not-divested units.
- general trends in heat rates.
The basic Divestiture effect: 2% reduction in Heat Rate
OLS
Dependent Variable:
ln(Heat Rate)
With
Controls
Only
Divested
Units
With
Controls
-0.022**
-0.021**
-0.022**
-0.013
(0.010)
(0.010)
(0.009)
(0.009)
-0.405***
-0.364***
-0.380***
-0.106
(0.024)
(0.018)
(0.068)
(0.120)
Month-Year Fixed Effects
No
Yes
No
Yes
Unit or Unit-Interval Fixed
Effects
Unit
Unit
Unit
Unit
R2
.56
.54
N
22,506
75,066
19,501
64,882
Divestiture
ln(Q)
See Table 4 in the paper.
Only
Divested
Units
IV
Why do we see lower heat rates after divestitures?
•
Utilities only sold plants that were ripe for improvements.
•
Utilities deferred maintenance before they sold the plants;
merchant firms have been regaining lost ground.
•
Merchant firms faced new incentives—incentive effect.
•
New owners shook things up—ownership effect.
In states with major divestitures, IOUs sold nearly all their
thermal capacity.
Total Fossil
Fuel MW
IOU % in 2003
CA
36600
2%
CT
5750
0%
DC
590
0%
DE
3084
0%
IL
32486
5%
MA
11983
0%
MD
10373
1%
ME
2860
0%
MT
2448
6%
NJ
15258
4%
NY
28196
19%
PA
33424
5%
State
Total Fossil
Fuel MW
IOU % in 2003
IN
26342
71%
KY
19482
49%
NH
2523
43%
OH
32782
55%
VA
16501
63%
State
Table 7: evidence on incentive and ownership effects
OLS
Dependent Variable:
ln(Heat Rate)
All Units
Divestiture
All Units
-0.024**
(0.011)
External Only
Incentive Regulation
-0.019**
(0.010)
-0.003
(0.013)
-0.023
(0.018)
-0.067***
(0.024)
-0.019*
(0.010)
ln(Q)
-0.364***
(0.018)
-0.364***
(0.018)
Yes
0.54
75066
Yes
0.54
75066
External Both
Internal Subsidiary
Month-Year Fixed Effects
R2
N
IOU plants showed improvements in states with rate freezes,
suggesting incentives matter.
Evidence on effects of ownership transfers less clear.
What is being done differently at divested plants?
•
Are merchant firms operating at the “sweet spot” more?
•
Are merchant firms changing other aspects of operations
(combustion optimization software, fuel switching, etc.)?
Unit heat rate profiles
Overall
< 100 MW
> 100 MW
25
23
Average Heat Rate (mmBtu/MWh)
21
19
17
15
13
11
9
7
5
0
2
4
6
8
10
12
Capacity Interval
14
16
18
20
22
Implied magnitude
•
Our estimates suggest that plants have ~2% lower heat rates
after the divestiture.
•
At current fuel prices, this amounts to about $0.6/MWh.
- At the plants that were divested, this adds up to savings of
nearly $500 million per year.
- Scaling this up to all thermal plants nationwide, this could add
up to almost $1.5 billion per year.
•
Improving fuel efficiency helps achieve environmental goals,
especially with respect to CO2.
Conclusions
•
In light of the California electricity crisis, it is useful to remind
ourselves about the potential efficiency gains of restructuring.
•
This paper focuses on fuel efficiency at existing generating
plants.
•
Evidence is positive—owners respond to incentives.
•
Additional efficiency gains possible through:
- More efficient long-term (capital) investment.
- Incentive regulation for transmission and distribution.
- Reallocating output across plants.