Background

Have you ever taken a close look at your electricity bill and wondered how the priceper kilowatt hour is determined? Did you know that the efficiency performance of Jamaica’s electricity provider relative to those in other countries can influence the price you pay for electricity?

Introduction

At present, we do not have a very good way of measuring the technical efficiency of electricity providers. That is, we do not know how well electricity providers are using inputs such as labour and capital to produce a given output level. This is important because it affects electricity prices and could also help in establishing best practice standards. So, the question we need to address is, given the differences in the environment that electricity providers operate, can we obtain meaningful efficiency estimates from cross-country comparisons with other Small Island Developing States(SIDS)?

Methodology

• Data-Cross-sectional input and output data on 32 electricity distribution networks from the Pacific and Caribbean region were collected for 2010.
• Statistical Analysis -Bias-corrected efficiency scores were estimated using a two-stage double-bootstrap data envelopment analysis (DEA) method.

Results

Even though most utilities are not using their inputs efficiently, after accounting for differences in the operating environment, many Caribbean electricity providers had above-average efficiency compared to those in the Pacific region(see Figure 1). Figure 2 shows that all utilities could become fully efficient by reducing their inputs by between 2 to 17% annually over a 5-year period and still produce the same level of output.Other results reveal that electricity providers in more densely populated countries are more efficient.

Conclusion

X-factor efficiency targets were within the range of -2% and -17% for the utilities investigated. This suggests that reliabletargets can be obtained when environmental conditions are taken into account.

Relevance and Potential Application

Bias-corrected efficiency estimatescan prove invaluable to the utility industry and regulatory bodieswhen setting electricity prices.