Substitution between Purchased Electricity and Fuel for Onsite Power Generation in the Manufacturing Industry: Plant level analysis in Japan

Using plant level data, we investigate the substitution between purchased electricity and fuel usage for onsite power generation by estimating the cross price elasticities in Japan. We find that the sensitivity of the fuel demand for onsite power generation to the changes in the price of purchased electricity and the degree of sensitivity depend heavily on industrial characteristics. We also calculate the expenditure elasticities for the fuels and find that firms prefer to use electricity generated on site compared to purchased electricity. Furthermore, from the analysis of the preference for fuel types used in onsite generation, we find that coal, which is relatively inexpensive but has relatively high CO₂ emission, is increasingly preferred by firms across industries. Some industries indeed are contributing to the reduction of CO₂ emissions by either replacing oil with scrap materials as fuel and/or utilizing recovered fuel or byproducts to generate onsite power. The results indicate the effort capacity to reduce emissions appears to heavily depend on industrial characteristics.