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The Impact of Resource Abundance on the Efficiency of
Electricity Generation
Sebastian Voigt
Centre for European Economic Research (ZEW), P.O. Box 10 34 43, D-68034 Mannheim, Germany
E-Mail address: [email protected]
Overview
The efficiency of hard coal fired power plants, i.e. the ratio of their electricity output and hard
coal input, differs considerably from country to country and over time. These differences do
not only occur between developed and developing countries but also between industrialized
nations. Based on this observation the question for the reasons of these discrepancies arises.
From an intuitive point of view we assume that countries with an abundance of hard coal or
relatively low costs of extraction should show smaller degrees of efficiency than countries
with poor deposit of resources because the latter regions have a stronger dependency on
efficient power plants than the former. Furthermore, we expect that rising hard coal prices
increase efficiency and vice versa since pricing pressure should result in more productive
ways of electricity generation. In order to test for the mentioned effects we perform an
econometric analysis including several additional control variables.
Methods
Our empirical analysis tests the hypotheses outlined above using a unique panel data set for
18 countries, hard coal abundant states as well as countries with less reserves of this resource,
from 1978 to 2005. Coal exports as a fraction of Total Primary Energy Supply (TPES) of
coal, the explanatory variable of our major interest, serve as a measure for the level of hard
coal deposits. In addition, the price of hard coal is introduced as another central explanatory
variable. The most important control variables include GDP per capita, hard coal
consumption, inflows of foreign direct investments (FDI) and, as dummy variables, the
membership in environmental and economic agreements, i.e. ratification of the Kyoto
Protocol and membership in the European Union. We apply modern panel data techniques
taking country and time effects into account. Each variable except for the dummies is lagged
by one year to obtain a more realistic view of the issue since changes in most indicators need
some time to actually affect the efficiency level. We employ the within group estimator to
perform the regressions meaning that we consider fixed effects panel data models.
Results
Estimation results confirm our hypothesis stating a negative relationship between efficiency
degrees and the coal export-TPES ratio with a significant coefficient for this variable. As
expected, a significant positive relationship is identifiable for hard coal prices. Furthermore, a
significant impact of GDP per capita and FDI inflows on efficiency cannot be observed. The
influences of these variables are subsumed by time fixed effects which can be interpreted as
progress driven by technological change. No significant impact is detected for the ratification
of the Kyoto Protocol either whereas membership in the EU has a significant positive impact
on efficiency. The latter result can be construed as a higher technological standard in the EU
member states compared to many other countries considered in our analysis. Altogether, we
can identify hard coal abundance and the hard coal price as the key drivers for hard coal based
power plant efficiency among the explanatory variables.
Conclusions
From an environmental political perspective we conclude that a taxation of hard coal in
countries with abundance of this resource might lead to a more economical electricity
generation, thus reducing emissions of carbon dioxide. Together with the results concerning
the positive impact of the hard coal price on efficiency we can deduce that this policy
suggestion is justified to reach a lower emission level. Moreover, a policy instrument which is
similarly appropriate to induce emission reductions is R&D subsidies, in particular for
energy-related R&D, in order to foster technological development.
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