Measuring thermal efficiency improvement in power generation: the Divisia decomposition approach

Since improved thermal efficiency reduces capacity requirements and energy costs, electricity producers often treat thermal efficiency as a measure of management or economic performance. The conventional measure of the thermal efficiency of a fossil-fuel generation system is the ratio of total electricity generation to the simple sum of energy inputs. As a refined approach, we present a novel thermal efficiency measure using the concept of the Divisia index number. Application of this approach to the Korean power sector shows improvement of thermal efficiency of 1.1% per year during 1970–1998. This is higher than the 0.9% improvement per year given by the conventional method. The difference is attributable to the effect of fuel substitution. In the Divisia decomposition analysis context, we also show the limitations of the popular Törnqvist Divisia index formula and the superiority of the Sato–Vartia Divisia index formula.