Is Privatization Enough? Finding Performance Breaks for UK Power Plants

Abstract

The literature shows that for most UK industries privatization might be necessary but is not sufficient to produce economic benefits. Often prior changes in management or later changes in market structure and regulation have larger impacts than privatization itself. We ask what changes around privatization had the greatest impact on efficiency for UK electricity generators. We analyse the effects of privatization and other changes in incentives on plant efficiency using a newly compiled unbalanced panel of about 60 plants for the years 1980 to 2004. We measure efficiency as input demands for two standard inputs, fuel and labour as well as three air emissions, CO2, SO2, and NOx. We model the change in efficiency as a single intercept break and allow for the break to occur at an unknown date. Inference for breaks and break dates relies on Quandt-Andrews type tests. We find breaks associated with efficiency increases for fuel and labour. Breaks and efficiency changes for the three emissions are generally related to fuel efficiency though there are instances where efficiencies move in opposite directions suggesting trade-off between fuel efficiency and emissions exist. There are no breaks prior to privatization. All breaks occur after privatization. Efficiency increases first for labour and later for fuel. We conclude that electricity privatization like other UK privatizations was a unique event. Privatization was important to prepare the ground but it seems that only the subsequent restructuring of the industry, the reduction of political interference in fuel choice, and investment in new and more efficient generation technologies increased efficiency.