Input Substitution in the Coal-Fired Electric Power Industry

A gradual increase in the price of oil, a decline in the supply of gas, and a lag in nuclear construction leaves coal (a potential major resource for the future energy needs) as a fuel in ample supply. The major portion of the United States\u27 electricity is generated by steam-driven generators where steam is produced by fossil fuel-fired boilers. In 1978, 47 percent of the total electricity generation was fueled by coal, up from 43 percent in 1975. Use of coal in generation of electricity has spawned numerous research projects concerning the economics of the coal-fired electric power industry. The majority of the empirical works employed estimates of cost or production functions derived from the traditional strong separable functions (i.e., Cobb-Douglas or Constant Elasticity Substitution models). In the case of multiple-output, multiple-input models, constancy of elasticity of substitution proves to be highly restrictive. Limitations of conventional models have motivated the use of more general models, specifically the transcendental logarithmic function which imposes no separability restriction a priori. Absence of new empirical studies for the industry, provides sufficient justification for the empirical study of the economic relationship between inputs and outputs in the coal-fired electric power industry. Also absent in previous works is the element of machine mix and air pollution control factors. The analysis of substitution possibilities between inputs and the existence of a technological change from the objectives of the present study. Substitution and price demand elasticities are estimated which provide guidelines and useful information for planning and design of optimally more efficient coal-fired power plants. These estimated elasticities can be used to analyze the impacts of some selected government or industry policies, or they can provide guidance in further policy development and research. A transcendental logarithmic multiple-input, multiple-output cost function is adapted to the cross-section data of the coal-fired electric power industry for 1973 at the plant level. The maximum-likelihood ratio test is used to empirically test the validity of various restrictions on the productive structure. The model used in this study provides for a share-specific elasticity to be computed for each price and share observation. Results drawn from this study suggest that models with constant elasticity of substitution (i.e., Cobb-Douglas, and the Constant Elasticity Substitution and Separable models) do not appropriately represent the structure of the United States\u27 coal-fired electric power industry. Although the empirical findings at the industry level provide substitution possibilities can be found for several vintages. Scale economies are present; and contrary to the findings for the power industry, it was found that the coal-fired power plants do not operate on the flat portion of the average cost curve