Changing Patterns of Electricity Usage in European Manufacturing: A Decomposition Analysis

Abstract

This paper investigates the changing patterns of electricity intensity in Manufacturing in European countries since 2000. While GVA in Manufacturing has grown and electricity use has declined, it is not clear that this decrease in intensity is directly associated with improvements in technology. Decomposition of the effect suggests that a switch towards less energy intensive sectors accounts for roughly 10% of the total change in electricity intensity. A further level of disaggregation accounts for the factor mix and suggests substitution from labor to electricity. This does not appear to be driven by factor prices, as electricity prices grew significantly more than wage compensations within the sample. The adjusted intensity effect is consistently found to be negative and the average decrease in labor intensity has been more pronounced than the corresponding decrease in electricity intensity. Accordingly, aggregate changes cannot purely be attributed to less electricity-dependent modes of production, but are rather due to general improvements in productivity. Keywords: decomposition analysis; electricity intensity; European manufacturing; Logarithmic Mean Divisia Index (LMDI) JEL Classifications: L60; D24