Electricity Economics: Production Functions with Electricity PDF
Preview Electricity Economics: Production Functions with Electricity
Zhaoguang Hu · Zheng Hu Electricity Economics: Production Functions with Electricity Electricity Economics: Production Functions with Electricity Zhaoguang Hu • Zheng Hu Electricity Economics: Production Functions with Electricity 123 ZhaoguangHu ZhengHu StateGridEnergyResearchInstitute UniversityofDelaware Beijing,People’sRepublicofChina Newark,DE,USA ISBN978-3-642-40756-7 ISBN978-3-642-40757-4(eBook) DOI10.1007/978-3-642-40757-4 SpringerHeidelbergNewYorkDordrechtLondon LibraryofCongressControlNumber:2013953931 © Springer-VerlagBerlinHeidelberg2013 Thisworkissubjecttocopyright.AllrightsarereservedbythePublisher,whetherthewholeorpartof thematerialisconcerned,specificallytherightsoftranslation,reprinting,reuseofillustrations,recitation, broadcasting,reproductiononmicrofilmsorinanyotherphysicalway,andtransmissionorinformation storageandretrieval,electronicadaptation,computersoftware,orbysimilarordissimilarmethodology nowknownorhereafterdeveloped.Exemptedfromthislegalreservationarebriefexcerptsinconnection with reviews or scholarly analysis or material supplied specifically for the purpose of being entered and executed on a computer system, for exclusive use by the purchaser of the work. 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Printedonacid-freepaper SpringerispartofSpringerScience+BusinessMedia(www.springer.com) Preface This book provides an investigation to study the close and in-depth electricity economics on the power demand side. Traditionally, research of electricity eco- nomics has long been focusing on power supply side, that is, power generations, transmissions, distribution, and power deregulation; however, this book provides a completely different perspective of analysis, which is studying the economy by using electricity demand data. Electricity can be used to measure economic scenariosduetothereliabilityofelectricitydata.Electricityeconomicsondemand- side analysis could open up new territories for scholars to discover, explore, and study meaningful research values that could benefit the human society and economic activities. This book contains large amount of data and case studies on theUnitedStates,China,Japan,etc.Itisintendedforscientists,engineers,financial professionals, policy makers, consultants, and anyone else with a desire to study electricityeconomicsandrelatedapplications. Electricity data has been commonly used to represent almost all types of productions at different production levels, that is, from firms to sectors, from sectors to industries, and from industries to the national economy. Electricity data can be served as an accurate input of economic productions, since electricity consumption cannot be massively stored in large quantities, and power generation and consumption must be balanced simultaneously; thus, it can be served as the indexofproductionfactorinalmostallkindsofeconomicactivities.Togetherwith the features of enabling devises (such as smart meters) that have access to real- time electricity data on per 15 min bases, it is a convenient source for conducting economicstudiesthatrequireaccurateandreliableelectricitydata. Enlightenment Consciousness Questionsarecommonlyraisedwhetheranymethodologycouldallowustoobtain further economic insight from electricity data. Consequently, this book provides answerstothebelowquestions: v vi Preface 1. Basedontheconceptthatelectricityconsumptionisarepresentativeofinputs,it isfurtherdiscoveredtheprincipleofproductionfunctionwithelectricity,which illustratestherelationshipofelectricityandproductionoutputofafirm,which isthemostfundamentalofaneconomy.Followingthisstructure,towhatdegree does the production function with electricity represent economic activities on theleveloffirms,sectors,industries,countries/regions,aswellasthescaleof globaleconomy? 2. Historically, one of the most renowned production functions is the Cobb– Douglas function. To what degree does production function with electricity simplify Cobb–Douglas production function, and if the production function withelectricitybetterillustratesthecurrenteconomicactivities? 3. Fromtheglobalperspective,Chinahasthebiggestamountsofelectricitysupply and demand, for example, China’s electricity consumption was 4,959 billion kWh in 2012. The premier of China, Li Keqiang pays great attentions to data of electricity, investment, and freight to evaluate the key components of China’snationaleconomyonmonthlybasis.Chinarefers“Keqiangindex”as electricity weights 40 %, and the other two factors share 30 %, respectively. Whatisthereasonthatelectricityreceivessuchgreatattentionfromthecentral government? 4. DNA is a key determinant to human life. The key characteristics of DNA combinations can be briefly summarized as replication, mutation, uniqueness, andevolution.Economicsystemalsohasverycomplicatedpatterns.Istherea similaranalogyofanygene-likecharacteristicsinaneconomy? 5. It is generally agreed that energy intensity is negatively correlated with technology innovation and improvements. However, why electricity intensity is actually positively correlated with technology innovations? Is there any relationshipbetweenenergyintensity,electricityintensity,andelectrification? 6. Atraditionalmethodtorepresenteconomicdevelopmentisbyusingpercapita GDP.However,monetarydataandexchangeratesofdifferentcountriesusually varywithtime.Isitpossibletoevaluateeconomicdevelopmentbyinvestigating electricitydata,forexample,percapitaelectricityconsumptionandpercapita householdelectricityconsumption? 7. After the 2008 global financial crisis, President Obama of the United States tried to increase employment opportunities by promoting re-industrialization. This book argues that after the phase of postindustrialization, it should be up-industrialization instead of re-industrialization. To what perspectives does up-industrialization better than re-industrialization after the phase of postindustrialization? 8. Economic activities can be influenced by policies, especially fiscal and mon- etary policies. How could policies influence economic activities more effec- tively?ThisbookshowsseveralcasestudiesofChina’seconomicperformance and policy impacts in 2011 and 2012. Readers are encouraged to conduct similarcasestudiesforothercountries. 9. Theinput–outputtableisausefultoolforeconomicanalysis;however,ithardly hasanyannualupdates.Artificialintelligence(AI)hasbeensuccessfullyused Preface vii inmanyfields.IntegratingAIinourresearch,itisappliedagent-basedmodel andadvancedmulti-agentsystemtosimulatetheeconomy.Ouragentresponse equilibrium(ARE)modelcanprovideweeklybasedsimulationsonproductions ofalllevels,performanceofmarketpurchases,policyregulations,etc.Withthe accessibilitiestothesedata,itcanthenbuildtheupdatedinput–outputtableof aneconomyweekly.WhatdoyouthinkofusingAItoeconomicresearch? 10. Itisgenerallyagreedthatelectricitypricehasshort-termimpactsonelectricity demand. What about long term? This book also studies the long-term impact ofelectricitypriceonelectricitydemandaswellasotherpossiblefactorsthat influenceselectricitydemand. 11. Labor and electricity are positively correlated. During a production activity, higherelectricitydemandindicatestheincreasinghigherlabordemand.What is the relationship between the job potentials of commercial and industrial electricitydemand?InChina,theincreaseof1millionkWhelectricitydemand inindustrycanprovide29.9jobsinindustry;itis370.1incommercial.Inthe UnitedStates,itis44.3inindustryand46.9incommercial.Whyindustrialjob opportunitiesarehigherintheUnitedStatesthaninChina,whilecommercial jobopportunitiesarehigherinChinathanthatintheUnitedStates? The RoadMapofResearchDevelopment Dr.ZhaoguangHuhaslongbeenstudyingeconomicissuesfromreadingelectricity characteristics.HeworkedattheElectricPowerResearchInstituteofChinainthe 1980s and awarded the government special prize on great contribution to science by the State Council, then invited to be the vice president of the State Power Economic Research Center in 1999. Since then, Dr. Hu has encountered hundreds ofprojectsthatinterpretedeconomicactivitiesthroughelectricity,forinstance,the 1997 Asian financial crisis reduced China’s economic growth. China’s electricity industry experienced a power surplus, investments of power plant constructions wereconstrained,andthe10thFive-YearPlan(2001–2005)wasalsodeflated. Based on the pattern of electricity consumption, Dr. Hu studied a 9-year- economic-cyclepost2000.ItsuccessfullypredictedthatChina’seconomicgrowth wouldgrowfastin2003–2005,whileChina’selectricityindustrywouldsufferfrom power shortage, and then the economy would slow down in 2007–2008. Dr. Hu furthersuggestedChina’sleadingofficialsofthegovernmenttoimplementdemand- side management (DSM) to reduce power demand. China’s former vice Premier JiuHuang gave high admiration tothe advice and instructed related governmental regulatorsatalllevelstopracticeDSMinordertotackletheurgentpowershortage issue.Thispieceofpolicyadvicesuccessfullyavoidedseriouseconomiclossesthat could be caused by further power shortages, and since then, DSM projects have widelyappliedinChina.Decadesofexperiencehavebestirredustosummarizeour knowledgeandalsotoelaborateourthoughtsinthisbook. viii Preface Currently there is a lack of related research in performing economics via electricityconsumption;thisbookfillsthegapbyprovidingmathematicalconcepts as well as supports from empirical case studies. We began to write this book in 2007,whichwasbasedontherulethatelectricityconsumptionpositivelycorrelates with gross domestic product (GDP). We realized that the cell of economy, as an analogy of DNA characteristics, should be referred as economic activities on a firm level. We also discovered that it is essential to study the production function from the firm level to the sectoral level, and then to the industrial and further influence that on the national level. We further studied the production functions with electricity, which is the fundamental of electricity economics. Analysis in this book investigates the characteristics of production functions with electricity. Gene plays an important role in determining a human body. The characteristics of production functions with electricity, replication, mutation, uniqueness, and evolution are found very similar with characteristics of a human DNA. This book further demonstrates the phenomenon of re-industrialization in the United States for creating employment opportunities and concludes that instead of re- industrialization,up-industrializationshouldbetheidenticaleconomicdevelopment stagefollowingpostindustrialization,andtheUnitedStateshasalreadyenteredthe stageofup-industrializationsince2005. Mathematics is a very elegant discipline with its inner beauty, which contains rigid reasoning and logical thinking capabilities. Hence, chapters in this book describe the concepts, features, and characteristics of electricity economics by using simplified mathematical definitions, theorems, and proofs. Case studies and examplesareprovidedtosupportourexplanations;itwouldbehelpfulforreaders withoutsubstantialmathematicalbackgroundtounderstandthecontents. Structure The content flow in this book follows the structure of micro-level analysis to macro-level analysis. Chapter 1 introduces the key concepts of electricity eco- nomics, demand-side management, smart grid, etc. Chapter 2 demonstrates that electricity consumption is a representative of production inputs on the firm level andproductionfunctionswithelectricityareintroducedandcomparedwithCobb– Douglas production function. Chapter 3 discusses the production functions with electricityonsectorallevel.Sincethesupply–demandrelationshipisoneofthemost importanteconomicmodels,Chapter4studiesthep-emodel,whichillustratesthe relationshipbetweencommoditypriceandelectricityconsumptionunderchanges. Analysisonindustrial-levelproductionfunctionswithelectricityisshowninChaps. 5 and 6 reviews E-GDP function, the production function with electricity for a national economy, and comparisons of different economic development stages in the United States, Japan, and China are also attached. In Chap. 7, we study the gene characteristics of economy by using production functions with electricity. Chapter 8 studies the principle that declines of energy intensity with growing Preface ix level of electrification could provide maximum economic support by minimum energy input. The characteristics of electricity consumption at different economic development stagesarediscussedinChap. 9.Up-industrialization isintroduced in Chap. 10 by comparing cases in different advanced countries. Chapter 11 follows the analysis of the E-GDP functions by analyzing cases in Europe, America, and Asian. The macro-level demand–supply models are discussed in Chap. 12, which includesthefunctionandeffectofeconomicpoliciesonChina’seconomicgrowth. Chapter 13 discusses the importance of using electricity data to update the input– outputmodel.InChap.14,westudythelong-termelectricitydemandwithfactors likeprice,technologyinnovations,andeconomicgrowth.Therelationshipoflabor, capital,andelectricitydemandareelaboratedinChap.15. Acknowledgments Prof. Huijiong Wang from the Development Research Center of the State Council of the People’s Republic of China has carefully read the draft of this book. He alsomadedetailedcommentsonthetrainofthoughtfoundinthisbook,aswellas chapterstructures,statementsofconcept,andthederivationofformulas.Dr.Jiahua Pan, an internationally renowned expert from the Chinese Academy of Social Sciences,alsogreatlycontributedtothedraftofthisbook.Especially,hesuggested tohighlightthedifferencesbetweenproductionfunctionswithelectricityandCobb– Douglas production function. Prof. Boqiang Lin, the Chang Jiang Scholar from Xiamen University, also carefully reviewed the draft of this book. He proposed suggestions that were of great value and hoped that this book become a textbook for graduate students. Prof. Xiliang Zhang, a famous energy economist from TsinghuaUniversity,alsoprovidedvaluablecomments.Prof.MinyingYang,from the Chinese Academy of Social Sciences, has read the draft of this book and put forwardsuggestionsonmodificationsfromdifferentperspectivesthathavecertainly enlightenedourthoughts. Prof.DongxiaoNiu,aChangJiangScholar,andProf.ZhongfuTan(NorthChina Electric Power University, China); Prof. Yuhui Zhou (Beijing Jiaotong University, China); Ms. Ying Ran (the former Chief Engineer of the State Power Corporation of China); Mr. Xinmao Wang (the former Director of the State Power Economic Research Center, China); Prof. Hameed Nezhad (Metropolitan State University, United States); Dr. Jianhui Wang (Argonne National Laboratory, United States); Dr. Dong Wang (Rio Tinto, Australia); Prof. Zhongxiang Zhang and Prof. Lipo Wu(FudanUniversity,China);Mr.GangHe(UniversityofCaliforniaatBerkeley, UnitedStates);Dr.MingYang(GEF,theWorldBank);Dr.XinminHu(theLantau Group HK Limited, Hong Kong); Mr. Kevin Jianjun Tu (Carnegie Endowment for International Peace, United States); Prof. Xiaoping Zhang (University of Birmingham, United Kingdom); Dr. Fredrich Kahrl (Energy and Environmental Economics, Inc., United States); Dr. Jianwei Tian (China National Institute of Standardization, China); Dr. Wanshan Zhu (Tsinghua University, China); Dr. Chi
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