Industrial electricity demand and energy efficiency policy

Abstract: This dissertation consists of an introduction and five self-contained papers addressing the issues of industrial electricity demand and the role of energy efficiency policy. An important context for the study is the increased interest in so-called voluntary energy efficiency programs in which different types of tax exemptions are granted if the participating firms carry out energy efficiency measures following an energy audit. Paper 1 conceptually analyses the cost-effectiveness of voluntary energy efficiency programs targeted at the industrial sector. A broad methodological framework is outlined, and discussed in the empirical context of the Swedish PFE program. The results show that the presence of information inefficiencies and asymmetries represents one of the major motives for policy intervention in the industrial energy efficiency field, but the substitution of energy management systems for electricity taxes, such as that achieved in the Swedish PFE program, does not necessarily address these market failures cost-effectively. Paper II provides an empirical assessment of the electricity efficiency improvement potential in the Swedish pulp and paper industry by employing data envelopment analysis (DEA) and mill-specific input and output data for the years 1995, 2000 and 2005. The estimated electricity efficiency gap is relatively stable over time, and it equals about 1 TWh for the sample mills. This result is largely a reflection of the fact that in the pulp and paper industry electricity efficiency improvements are typically embodied in the diffusion of new capital equipment, and there is a risk that some of the reported energy efficiency measures in PFE simply constitute an inefficient speed-up of capital turnover. Overall the analysis suggests that future energy efficiency programs could be better targeted at explicitly promoting technological progress as well as at addressing the most important information and behaviour-related failures. In Paper III the electricity demand behaviour in the Swedish pulp and paper industry is analysed. A panel data set of 19 pulp and paper firms is employed within a Translog cost function, and the own- and cross-price elasticities of electricity demand as well as the impact of knowledge accumulation following private R&D on electricity use are estimated. The empirical results show that electricity use in the Swedish pulp and paper industry is relatively own-price insensitive, but they also display that already in a baseline setting firms tend to invest in private R&D that have electricity saving impacts. The objectives of Paper IV are to: (a) analyse long-run electricity demand behaviour in the Swedish mining industry; and (b) contrast this to the reported outcomes of PFE. Methodologically, a Generalized Leontief variable cost function covering a panel data set of nine mining operations over the time period 1990-2005 is used. The empirical results indicate that long-run electricity demand in the mining industry is sensitive to changes in the own-price, but the estimated electricity use increases following the tax reduction in PFE do not overweigh the self-reported electricity savings of the program. Finally, Paper V analyses the presence of structural changes in the Swedish pulp and paper industry, and we pay particular attention to altering energy demand patterns and factor substitution possibilities over time. The paper employs a flexible Translog cost function, and an unbalanced panel data set covering 32 pulp and paper mills over the time period 1974-2005. The results show evidence of more significant factor substitution possibilities over time, not the least between electricity and fossil fuels. In addition, fuel and labour demands have overall become more sensitive to short-run changes in relative prices.