What Drives the Efficiency of Hard Coal Fuelled Electricity Generation? An Empirical Assessment

Abstract

The efficiency of electricity generation in hard coal fired power plants varies considerably from country to country and over time. These differences occur both between developing and developed countries and between industrialised nations. The econometric analysis presented in this paper tests for the reasons of these discrepancies. In this examination abundance of hard coal and the price of hard coal are the two variables of our major interest. We assume that countries with an abundance of hard coal or relatively low costs of extraction show smaller degrees of efficiency than countries with poor deposits of this resource because the latter nations have a stronger dependency on efficient power plants than the former. Furthermore, higher prices should lead to more efficient electricity generation since production costs increase with growing hard coal prices. Our findings partially confirm these hypotheses and suggest that, among the chosen explanatory variables, hard coal abundance or the accessibility of hard coal, respectively, the hard coal price, the level of foreign direct investment inflows as well as the average power plant age are identified as principal drivers of power plant efficiency. From an environmental policy perspective we conclude that flexible policy instruments which internalise external effects caused by emissions as well as support for foreign investments are important means to foster energy efficiency. However, economic efficiency - even if contrasting with energy efficiency - must not be neglected in the design of energy policies.

Keywords: energy efficiency, natural resources, hard coal fired power plant

JEL Classification: Q40, O13