Substitution in the electric power industry: An interregional comparison in the eastern US

a r t i c l e i n f o The electric power industry is restructuring as regulations move from states to regional and national levels. Estimates of regional fuel and input substitution are essential for practitioners and policy makers. This paper estimates substitution under static and dynamic scenarios, examining changes in technology and total factor productivity from 2001 to 2008. Two-stage estimation reveals regional characteristics and underlying elements in fuel and factor choice processes. Substitution varies widely depending on the region, coal technology, capital investment, and R&D activities. Energy plays a crucial role in the global economy and will become the major economic issue of the coming century. A variety of policies have been initiated to promote improvements in energy efficiency and encourage development of alternative energy resources. The electric power industry is one of the largest consumers of fossil-fuel energy. Given the potential for substitution between factors of production (Söderholm, 2000a), the responsiveness of electric utilities to fluctuations in the prices of other fuel inputs and factor inputs is important for energy suppliers as well as for policy authorities to improve energy efficiency and promote energy conservation. Further, considering that the majority of emissions (particularly carbon dioxide) are caused by the combustion of hydrocarbons, the ability to switch fuels in the electric power industry becomes a major target and tool for environmental policy makers. For instance, the Energy Policy Act of 2005 supports increasing coal as an energy resource in conjunction with reducing air pollution by clean coal initiatives. According to the Annual Energy Review of the Energy Information Administration (EIA), in 2008 the electric power sector accounted for 91% of all coal consumption and 29% of all natural gas consumption in the US, while fossil fuels (coal, petroleum, and natural gas) accounted for 71% of all electricity net generation. Fuel choices and factor alternatives in electricity generation are important issues in energy policy. Based on the fact that the electricity generation industry is restructuring and regulation is moving from state to regional and national levels, accurate estimates of fuel and factor use in interregional electricity generation are essential for policy makers and planners. Several studies using various estimation models and samples have been devoted to the analyses of energy production and fuel/factor substitution in energy generation. Attention has been mostly given to national studies or international comparisons of interfuel substitution in the electric power industry. No …