Benchmarking energy use of iron and steel industry: a data envelopment analysis

Abstract

Purpose: The purpose of this paper is to benchmark the energy use of Indian iron and steel industry. For this purpose, the authors have estimated a production frontier to know the best performing states. Further, the energy-saving targets are estimated to lie below the benchmark level for those states. Panel data for this purpose are extracted from the Annual Survey of Industry (an official database from the government of India) for 19 major steel-producing states over the period from 2004–2005 to 2013–2014. Design/methodology/approach: The authors employed a radial and non-radial (slack-based measure) variant of the data envelopment analysis (DEA) to estimate the production frontier. Particularly, slack-based measures (SBMs) developed by Tone (2001) are used to get a more comprehensive measure of energy efficiency along with technical efficiency. Variable returns to scale technology is specified to accommodate market imperfection and heterogeneity across states. Four inputs (capital, labour, energy and material) and a single output are conceptualised for the production process to accommodate input substitution. The relative position of each state in terms of the level of energy efficiency is then identified. Findings: The authors started by examining energy-output ratio. The average level of energy intensity shows declining trends over the period of time. States like Bihar, Jharkhand, Gujarat and Uttarakhand remain stagnant in the energy intensity level. SBM of energy efficiency shows an overall average energy saving potential of 8 per cent without reducing average output level. Considerable heterogeneity exists among states in terms of the energy efficiency scores. Further, the authors calculated scale efficiency (SE) which shows the overall average level of SE is 0.91; hence, the scale of operation is not optimal and needs to adjusted to enhance energy efficiency. Originality/value: The authors demonstrate the empirical application of DEA with SBM to energy use performance. This is the first study that benchmarks Indian states in terms of the consumption of energy input to produce iron and steel by applying DEA.