Abstract
The assessment of the efficiency performance of the electricity sector has been the focus of attention of several studies, but there is a lack of scientific literature specifically addressing the financial performance of electric utilities during the period mainly impacted by the financial turmoil in the world’s financial markets. Hence, this paper is aimed at assessing the financial performance of regulated companies operating in the Portuguese electricity market from 2010 to 2014, a period particularly marked by the financial assistance provided to the Portuguese government. With this objective in mind, we propose a modelling framework which combines the use of the generalized method of moments estimation method with data envelopment analysis. The generalized method of moments estimation method allowed us to select the intrinsic corporate variables that were then used to assess the financial performance of electricity companies through the slacks-based measure model. In this framework, the return on equity, the leverage and the cash flow to total assets were selected as outputs, while the values of depreciations and amortizations to total assets have been regarded as inputs. Our findings suggest that both in 2010 and 2014 the majority of non-efficient companies should foster the investment in new fixed assets in order to become efficient. Additionally, in both periods, the majority of inefficient electricity companies should further increase their return on equity in order to become efficient, highlighting the role of this financial indicator in the explanation of financial efficiency. Moreover, in 2014, non-efficient companies are able to efficiently generate cash flows since almost no adjustments are required regarding the cash flow to total assets values attained for these companies. Finally, the need to promote leverage in order to increase financial performance is more evident in 2010 than in 2014, signalling the need to reduce the level of debt of these companies in this period.
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Notes
The retail electricity price corresponds to the price that is charged to the final consumer for the electricity produced, plus the margin on behalf of the retailer depending on the degree of competition in the market, plus the distribution and transmission network charges carried out by the Transmission System Operator (TSO) and the Distribution System Operator (DSO), and hence the regulated part of the sector, i.e. capital expenditure, which will reflect factors such as infrastructure costs, the design of the network, local factors (such as climate, geography, and environmental considerations), reliability standards, and cost of capital. The regulator generally determines the rate of return for the network operators and often the economic life of investments, which have implications on the capital costs of the system operator.
The wholesale electricity price reflects the costs of electricity generation, which include costs related to capital expenditure, fuels, including possible costs for environmental externalities (e.g. for CO2-allowances), and operation and maintenance costs.
The tariff deficit in Portugal represents a mismatch between the integral electricity tariff (which should cover energy, network, taxes, levies and other relevant costs) and the sum of the corresponding costs borne by energy utilities.
In fact, a high level of financial leverage can increase ROE, because it means a business is using the minimum possible amount of equity, instead relying on debt to fund its operations. As a result, the amount of equity in the denominator of the return on the equity equation is minimized. Therefore, if any profits are generated by funding activities with debt, these changes are added to the numerator in the equation, thereby increasing ROE, leading to the so-called financial leverage effect.
A capacity mechanism compensates the delivery of additional capacity in the electricity system in order to balance peak loads and be able to ensure security of supply.
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Acknowledgements
This work was partially supported by the European Regional Development Fund in the framework of COMPETE 2020 Programme through Project UID/MULTI/00308/2019, the FCT Portuguese Foundation for Science and Technology within Project T4ENERTEC (POCI-01-0145-FEDER-029820) and the European Regional Development Fund and Programa Operacional Regional do Centro e do Programa Operacional Regional de Lisboa through Project No. 023651, Learn2Behave (IIA—02/SAICT/2016).
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Neves, M.E., Henriques, C. & Vilas, J. Financial performance assessment of electricity companies: evidence from Portugal. Oper Res Int J 21, 2809–2857 (2021). https://doi.org/10.1007/s12351-019-00504-1
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DOI: https://doi.org/10.1007/s12351-019-00504-1