Industrial Electrification and Efficiency: Decomposition Evidence from the Korean Industrial Sector

Abstract

For this study, we conducted a decomposition analysis of industrial electricity consumption based on the logarithmic mean Divisia index approach. An empirical dataset consisting of 11 industrial sectors in Korea from 2000 to 2018 was used. The three-factor decomposition equation was extended to include four factors by decomposing the energy intensity effect into electrification and electricity consumption efficiency effects. The empirical results are summarized as follows: The increase in electricity consumption in the Korean industrial sector from 2000 to 2018 is mostly caused by the production effect. While the structure effect decreases electricity consumption, the intensity effect increases it. The key findings indicate that the hidden electrification effect can be confusing to researchers with regard to the intensity effect. The empirical evidence suggests that the intensity effect has a positive effect on electricity consumption induced by the electrification effect, although the efficiency effect continuously decreased electricity consumption. The decomposition results of some sectors show that electrification, rather than the production effect, contributed the most to the increase in electricity consumption. This implies that while replacing fuel with electricity has been successfully achieved in several sectors, there are still challenges regarding increasing energy efficiency and expanding clean electricity generation.