Measuring plant level energy efficiency in China's energy sector in the presence of allocative inefficiency

- A DEA's restriction is removed of energy inefficiency equal technical inefficiency.
- A new SFA approach that energy use frontier is determined by production technology
- Substitutions between energy and other factors are controlled for.
- Energy efficiency is evaluated for 150 plants from China's energy sector.
- Effect of economies of scale on energy efficiency is also evaluated.

Most studies on measuring China's energy efficiency were conducted in the framework of the input-oriented Data Envelopment Analysis. This approach generally calculates the technical efficiency by shrinking all the input factors equally proportionally subject to the observed output still being producible. Thus, all the input factor efficiencies, including the energy efficiency, are measured as the technical efficiency. One drawback of this approach is the presumption of an identical input factor frontier for all input factors and of unrestricted factor substitutability. The present study employs a stochastic frontier analysis approach to measuring energy efficiency that not only allows for non-identical input factor frontiers, but also controls for the effects on the measure of energy efficiency of substitution away from energy or substitution of energy for non-energy factors. This approach is applied to evaluating the efficiency performances of three types of energy amongst a sample of coal mines, petroleum refineries and power plants in China's energy sector which is specifically targeted by the Chinese government to improve energy efficiency.