Economies of Scale and Utilization: An Analysis of the Multi-Plant Generation Costs of the Electricity Commission of New South Wales, 1970/71–1984/85*

We examine the average costs of electricity generated in NSW at the site level employing a new simultaneous-equations model approach Further, we argue that costs depend principally on unit size and capacity utilization We reinterpret capacity utilization as a compositional variable which is a continuous proxy for the (inverse of) the intensity of demand for electricity, thus partially addressing the multi-product nature of electricity. Low capacity utilization corresponds to intense demands and hence peaking output We find that costs per kWh, as conventionally measured, are highly sensitive to the degree of capacity utilization but less so to unit size (scale). The results emphasize the need for tine-related pricing