Interfuel Substitution and Allocative Efficiency in Electricity Production in Nigeria

Allocative Efficiency in Electricity Production in Nigeria

Abstract

The reason of this paper is to examine the inter fuel substitution likelihood
and allocative efficiency between the two major fossil fuel inputs (oil and
gas) used in the production of electricity in Nigeria. The problem is studied
generally within a CES functional form representation, which was later
reduced to a C-D functional relation. We estimated a weakly separable
production function for oil and gas fuelled electric energy production
independent of other factor inputs. The estimation procedure adopted ADRL
approach using time series data for the period 1970-2006. The results
obtained from the analysis indicate that the elasticity of substitution between
the inputs is one, and therefore, producers could easily take advantage of
price changes to ensure allocative efficiency in their inputs combination for
oil and gas. However, the analysis in respect of allocative efficiency showed
that the production process was inefficient in allocation of inputs. The
conclusion provides future directions for inter fuel substitution in the thermal
electricity production in Nigeria.