Demand for industrial and commercial electricity: evidence from Japan

Abstract

This study aims to estimate electricity demand functions in Japan's industrial and commercial sectors. We adopt data from the Energy Consumption Statistics by Prefecture by the Ministry of Economy, Trade and Industry, Japan, to delineate the demand between the industrial and commercial sector. The results reveal that in both sectors, the price elasticity of demand is extremely low in the short and long run and production elasticity is greater than price elasticity. Thus, price elasticity is not a key determinant in electricity demand fluctuations. Furthermore, an analysis of the factors influencing changes in electricity demand in the industrial sector suggests that the declining demand growth in large metropolitan areas is mainly attributable to declining production factors, not increasing electricity rates. By contrast, the commercial sector is experiencing an increasing demand for electricity and significant growth nationwide, which can be attributed to an increase in commercial floor space and advances in office automation.JEL Classification: C33; C36; Q41; Q43; Q48 Keywords: Electricity demand; Industrial sector; Commercial sector; Demand price elasticity; Dynamic panel model; Japan BackgroundIn Japan, the industrial and commercial sectors account for a significant portion of electricity demand (about 70 %). Against this background and given that the nation's recent power market reforms increasingly focus on such users, understanding the demand for electricity in the two sectors is crucial from a regulatory policy viewpoint. In particular, determining the extent to which the demand for electricity in Japan fluctuates in response to a rate hike by each supplier company is a key political concern for energy policy makers. Moreover, changes in the composition of electric power generation, following the suspension of nuclear power plants and the introduction of renewable energy sources, are likely to increase electricity rates in the future. Therefore, determining the effects of fluctuating electricity rates on electricity demand in each region is critical for energy policy formulation in Japan.That electricity demand is inelastic is conventional wisdom, and thus, related research has often hypothesized that the price elasticity of electricity demand is significantly low (e.g., −0.1 or almost 0). For instance, Kanemoto et al. (2006) and Tanaka (2007) conducted simulations using a general equilibrium model for electricity market deregulations and hypothesized a price elasticity of −0.1 for electricity demand,

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