Table Of ContentZhaoguang 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
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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
