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Energy use efficiency of Indian cement companies: a data envelopment analysis

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Abstract

The present paper aims at measuring energy use efficiency in Indian cement industry and estimating the factors explaining inter-firm variations in energy use efficiency. Within the framework of production theory, data envelopment analysis has been used to measure energy use efficiency. Using firm-level data from electronic PROWESS database for the years 1989–1990 through 2006–2007, the study first estimates energy use efficiency of the firms and then compares the efficiency scores across. Empirical results suggest that there is enough scope for the Indian cement firms to reduce energy uses, though this potential for energy saving varies across firms. A second-stage regression analysis reveals that firms with larger production volume have higher energy efficiency scores and that age of the firms impacts differently on energy use efficiency obtained from two different models. Also, higher quality of labor force associates with higher energy use efficiency.

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Notes

  1. Both energy and value of output are measured in monetary units (Rs. Crore INR = Indian rupees)

  2. However, with 663 KCL of thermal energy/KG clinker and 69 KWH/T cement, Indian cement industry is one of the most energy-efficient industries in the world where the world best is 650 KCL/KG clinker and 65 KWH/T cement, respectively (Raina 2006).

  3. Mukherjee (2008a) uses a similar model in the context of Indian manufacturing sector. But in her paper, technology is assumed to exhibit CRS, while we are assuming VRS technology; since we are using firm-level data in our analysis, VRS is the appropriate nature of technology that can be assumed.

  4. All the inputs used in the cost minimization model are in expenditure form. We would have preferred to use physical quantity measures, but they are not available at the firm level. We hypothesize that the use of value measures are unlikely to introduce much bias in our measures because price of these inputs does not vary much across firms in a competitive input market.

  5. See Ray (2004) for a detailed exposition of different DEA models.

  6. The assumption of no technical regress seems to make sense for the sample years under study during which most of the cement companies did experience significant technological improvement.

  7. Slack-adjusted efficient point is Q in Fig. 1. Interested reader may refer to Ray (2004) for a detailed exposition on slack analysis.

  8. We prefer to take the geometric mean instead of the arithmetic mean because our efficiency measures are in ratio form defined as a ratio of optimum to actual use of energy.

  9. We are grateful to one of our referees for providing this information.

  10. The better measure for labor productivity could have been output per unit of labor/man-hour. In the absence of physical data on labor used, we have used this proxy on the assumption that labor market is competitive and they are paid according to their value of marginal product.

  11. The observed efficiency score is right censored at 1 as it is equal to the actual (latent) score whenever the actual score is <1; when the actual score is ≥1, the observed efficiency score is 1.

  12. But we should remember that our measure of efficiency is a relative concept, not absolute. It is measured by the distance from the best practice frontier. That best practice frontier has been constructed from the available information on the existing firms in a particular year. So ACC is 100% energy-efficient compared to other firms in that group, but in absolute sense, its efficiency may be <100%.

  13. See Mukherjee (2008a, b) and Reinhard et al. (2000) for this kind of model specification.

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Acknowledgement

We gratefully acknowledge the valuable comments and suggestions from Prof. Rabindranath Bhattacharya, Mr. Anup Kumar Bhandari, and Prof. Meenakshi Rajeev at the various stages of preparing the paper. We are also grateful to two anonymous referees of this journal for their helpful and constructive comments on an earlier draft of this paper. However, the usual disclaimer applies.

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  1. T.A. Pai Management Institute, Manipal, 576104, Karnataka, India

    Sabuj Kumar Mandal

  2. Centre for Economic Studies and Policy, Institute for Social and Economic change, Nagarabhavi (P.O), Bangalore, 560072, Karnataka, India

    S. Madheswaran

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Mandal, S.K., Madheswaran, S. Energy use efficiency of Indian cement companies: a data envelopment analysis. Energy Efficiency 4, 57–73 (2011). https://doi.org/10.1007/s12053-010-9081-7

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