Estimating price elasticity of demand for electricity: the case of Japanese manufacturing industry
- 68 Downloads
Many papers have estimated the residential and/or industrial price elasticity of demand for electricity. Most papers that study industrial elasticities analyze the elasticity for the whole industrial sector. Only a few studies have estimated elasticities for individual sectors, but even then, sectors are classified by broad divisions (alphabetical-letter industrial classification) such as agriculture, manufacturing, and services. Studies that classify sectors by major groups (two-digit industrial classification) such as food, chemicals or iron are rare. Companies that require large amounts of electricity will likely be influenced by an increase in the electricity price. After the Great East Japan Earthquake in 2011, activities at all nuclear power plants were halted. Electric power companies switched to generating electric power using thermal power plants instead of nuclear plants. This increased the electricity price because thermal power plants use expensive fossil fuels such as coal, petroleum, and liquefied natural gas (LNG). The increase in the electricity price imposed a heavy burden on manufacturing companies that consume a large amount of electricity. Some papers have discussed the fact that certain domestic manufacturing companies faced disadvantages and accelerated off-shoring when electricity prices increased. Hosoe (Appl Econ 46(17):2010–2020, 2014) simulated the effects of the power crisis on Japanese industrial sectors using a CGE (Computable General Equilibrium) model. The simulation indicated that the power crisis would decrease domestic output of the wood, paper and printing, pottery, steel and nonferrous metal, and food sectors in Japan, and would accelerate their foreign direct investment. For this paper we estimated the price elasticity of the electricity demand for each industry (major groups) in manufacturing, using the partial adjustment model and the Kalman filter model. In the partial adjustment model, the elasticity of electricity demand of manufacturing in aggregate is − 0.400. Other studies showed that the elasticities of electricity demand including different industrial sectors range from − 0.034 to − 0.300. We found that demand in the manufacturing sector is more elastic than in the aggregate of industrial sectors. They also found that elasticities differ greatly between sectors (major groups) in manufacturing. Sectors with more elastic electricity demand than the aggregate of manufacturing include textile mill products (− 0.775) followed by plastic, rubber and leather products (− 0.701), ceramic, stone and clay products (− 0.701), pulp, paper and paper products (− 0.570), printing and allied industries (− 0.530), machinery (− 0.485), food, beverages, tobacco and feed (− 0.468), miscellaneous manufacturing industries (− 0.413), and lumber and wood products (− 0.403). On the other hand, the less elastic sector is iron, steel, non-ferrous metals and products (− 0.251). The chemical and allied products (− 0.147) sector is not statistically significant at 5% level. In general, less elastic industries need electricity more. In other words, electricity is a necessary good for inelastic industries. The low elasticity implies that these industries cannot reduce electricity consumption even when electricity prices increase. This implies that a high electricity price is a heavy burden on these companies. Inelastic industries can move their operations overseas to access cheaper electricity or they can stop their operations when the price of electricity increases. We believe that policy makers should consider the elasticity of electricity demand because an increase in electricity price has the real possibility of aggravating de-industrialization and/or raising the unemployment rate.
KeywordsPrice elasticity of industrial electricity demand Regulatory reform of Japanese electric power industry Partial adjustment Kalman filter
JEL ClassificationC32 C33 Q41 Q48
I would like to thank Professor Takashi Yanagawa for dedicated mentoring. I also thank Mr.Teizo Anayama for insightful comments during the 16th International Conference of the Japan Economic Policy Association. Of course, all remaining errors are the author’s responsibility.
- 1.Agency for Natural Resources and Energy. (2016). Electric power statistics. http://www.enecho.meti.go.jp/statistics/electric_power/ep002/results.html (in Japanese).
- 2.Agency for Natural Resources and Energy (2017) Kaisei FIT hou shikou ni mukete. http://www.meti.go.jp/committee/sougouenergy/shoene_shinene/shin_ene/pdf/017_01_00.pdf (in Japanese).
- 10.Federation of Electric Power Companies of Japan. (2017) Statistical information of electric power. http://www.fepc.or.jp/library/data/tokei/index.html. Accessed 30 June 2017.
- 16.Hsiao, C. (2002). Analysis of panel data, Edition 2. UK: Cambridge University Press.Google Scholar
- 20.Institute of Energy Economics, Japan. (2017). EDMC handbook of Japan’s and world energy and economic statistics 2017. The Energy Conservation Center, Japan.Google Scholar
- 21.Kaino, K. (2002). Development of energy policies. In 3rd Technical Committee on Economic Analysis of Environmental Tax in General Assembly and Global Environment Committee on Central Environment Council (in Japanese). Google Scholar
- 23.Ministry of Economy, Trade and Industry (METI). (2011) White Paper on Manufacturing Industries (Monodzukuri) 2011. Ch. 2—Sec. 2. http://www.meti.go.jp/report/whitepaper/mono/2011/pdf/honbun02_02_01.pdf (in Japanese).
- 24.Ministry of Economy, Trade and Industry (METI). (2016) Economic Census for business activity. http://www.meti.go.jp/english/statistics/tyo/census/index.html
- 32.Sonoda, K et al. (1999). Estimating price elasticity in considering the stagnation of energy price. Essays form the 18th Energy system, Economy, Environment conference (in Japanese). Google Scholar
- 33.Tanishita, M. (2009). Estimation of regional price elasticities of household’s electricity demand (in Japanese). Journal of Japan Society of Energy and Resources, 30, 1–7.Google Scholar
- 34.Tamechika, H. (2014). Residential electricity demand in Japan. Istanbul, Turkey: Proceeding of Fifth World Congress of Environmental and Resource Economists.Google Scholar