Scale efficiency for multi-output cost minimizing producers: The case of the US electricity plants

Highlights: • We provide scale efficiency measurements for multi-output cost minimizing producers. • Our method is nonparametric and takes the economic objective of the producers into account. • Our method can be used without observing the input prices. • We perform an analysis of more than 3300 US electricity plants from 1998 to 2012, producing up to 10 types of electricity. • We demonstrate that renewable electricity presents better scale of production than non-renewable electricity. - Abstract: To know whether the optimal scale of production has been reached is valuable information for producers. To date, scale efficiency measurements have only been suggested for the entire production process. For multi-output producers, more detailed results are required. Hence, in this paper, we show how to provide such information at the output level. Attractively, our output-specific scale efficiency measurements are nonparametric in nature, they take the economic objective of the producers into account, they can be defined without observing the input prices, and they are easy to interpret and to use in practice. We apply our methodology to a sample of more than 3300 US electricity plants from 1998 to 2012, producing up to 10 types of electricity. We show that, while there is a scale improvement at the total electricity generation level, this is not the case for each of the 10 types of electricity. Also, we demonstrate that, in general, renewable electricity presents better scale of production than non-renewable electricity. Finally, we highlight the importance of multi-output plants in the US electricity sector, and show that this type of plant is preferable for the production of non-renewable electricity, while single-output plants are preferable for renewable electricity.