Energy Substitution in U.S. Electricity Generation

Osei Yeboah¹, Saleem Shaik², Afia Fosua Agyekum¹, Julie Melikpor-Lee^1
(1. North Carolina Agricultural & Technical State University, USA; 2. North Dakota State University, USA)

Abstract: Rising electricity cost and increasing electricity consumption threatens the ability of businesses to continue in operation by complicating industrial production and operational requirement, thus the need for firms to substitute away from electricity to minimize cost. This paper uses panel seemingly unrelated regression (SUR) model to estimate the substitution between electricity and other forms of energy in U.S electricity generation. The factor share equations for different forms of energy are derived from translog cost function for 48 states from 1970 to 2010. The results from the empirical application suggest limited substitution potential for all the energy inputs. Further, natural gas was found to be the main substitute while wood and waste was a net compliment.

Key words: input substitution; energy; elasticity of substitution; factor shares

JEL codes: C33, Q4