The determinants of aggregated electricity intensity in China

This study provides technological change, factor demand and inter-factor substitutability measures for China electricity industry. We use individual fuel price data and translog factor cost function approach to estimate total factor cost functions and fuel share equations. The implied price and Morishima substitution elasticities for inter-factor are obtained. By estimating the substitution between factors, we try to explore the driving forces of aggregate electricity intensity. The results suggest that energy is substitutable to capital and complementary to labor regarding cross-price elasticity. Capital is Morishima substitution for energy and labor is complement to energy. Factor substitution, budget and technology effects contribute to the year-to-year volatility of electricity intensity in the proportion 62.5%:20.06%:17.44%.