Short-run and the long-run effects of electricity price on electricity intensity across regions

Abstract

Global electricity consumption has increased rapidly in recent years. Improving the efficiency of electricity use as an alternative and/or complement to the construction of new power plants has received recent attention because of the potential environmental harm and high cost of constructing new power facilities. The objective of our research is to determine the effects of electricity price on electricity intensity in the manufacturing sector with particular focus on how this relationship changes over space and time. As a case study, we developed a simultaneous-equations system for a three-input production function using 108months of panel data (January 2004 – December 2012) over 16 regions in South Korea. We found that increases in electricity price improved electricity intensity in South Korea’s manufacturing sector in the long run, but not in the short run. The effects of electricity-price increases on electricity intensity varied over time and space. The differences may have resulted from different degrees of (1) substitutability of electricity-consuming equipment between the short and long runs, (2) price impact on electricity demand and manufacturing output in the regions’ manufacturing sectors, and (3) technology improvement in manufacturing that allows substituting or replacing electricity-consuming equipment with high efficiency and lesspower consumption. Our findings imply that electricity-price management can be a potential policy tool to improve electricity intensity in the manufacturing sectors of countries with government-controlled electricity prices, with the following caveats. First, electricity price increases are likely to be effective as a long-term tool, but may not be as effective in the short run with some regional exceptions. Second, electricity price increases may hinder electricity-use efficiency in regions characterized by manufacturing sectors where price increases reduce manufacturing output more than they reduce electricity demand.