CRI Focus Areas


High Electric Prices Hurt Economic Growth

11/28/2018

This article was originally published on October 28, 2014 on the website InsideSources.com. This article is reprinted in its entirely with permission.   Economic research on the impact of energy prices on economic growth has focused largely on the volatility of the price of oil, which has triggered numerous economic crises and recessions (the mid-1970s oil embargo is the first example that may come to mind.) In our case, the main objective is to isolate the impact of electricity prices on economic growth as measured by the Gross State Product (GSP.) In this initial report we measure the response of economic growth to changes in electricity prices. As this is an initial attempt to approach the problem, we can’t predict or assume right now what the long-term impacts of high electric prices will be. In other words, we are not considering technological changes that could make production more electricity-efficient. Our approach is based mostly in common sense: if the relative price of a production input increases in a state vs. the other inputs then in the short term, production of goods that use that input intensively will be negatively affected.   The table below displays the calculation range of GSP growth (annual percentage of change) with respect to the percentage change in average electricity prices for the U.S., the state of Delaware and the surrounding states from 1997-2013. The table below shows how economic growth will vary when facing a percent change in electricity prices. The recessions of 2001 and 2008-2009 were factored into our calculations. CLICK DOWNLOAD DOCUMENT HERE TO SEE THIS GRAPH (bottom of page). The column on the left is the standard coefficient used in our calculation. Pay attention to the column on the right. The top number in each state’s block means we estimate how much each state loses per year in economic growth because of a 1% increase in electric prices. The number below is the margin of error we factored in. So again, using Delaware as an example, even though we estimate a loss of 3.76% of economic growth for a 1% increase in electric costs, the range is 2.25%. So the “true” cost of a 1% increase in electric prices ranges from as little as a 1.5% decrease in economic growth to an incredible 6% decrease in economic growth!     This analysis had a few factors which limited our ability to make a more accurate prediction. One of them is that in 1997 the U.S. Bureau of Economic Analysis began a new series of GSP calculations. In order to make a more accurate guess we didn’t want to combine the “old” calculations with the “new” ones which is why we only go back to 1997. Two important conclusions emerge. First, GSP is very sensitive to changes in electric prices over time. Second, it is clear the correlation between high electric prices and lower or negative economic growth is statistically significant. As  an additional reference, the average electricity price per kilowatt hour for the average American home from 1997-2013 was $6.74. Pennsylvania’s average was $7.29, Delaware’s was $8.07, Maryland’s was  $9.36, and New Jersey’s $11.38. In terms of economic growth, Delaware posted 3.2% and it was the best performer of the group over the 16-year period.   A couple specific observations may be helpful. First, despite the high average electricity rate, New Jersey still has a large, electricity intensive chemical industry. Clearly, a chemical plant cannot be moved, stopped, or replaced easily and the chemical pole located near the Hudson River is still enjoying the New Jersey-New York port facility. Second, while corporations with large sunk investment cannot move easily, businesses which are starting up, expanding, or looking to move should not be expected to grow in states with higher-than-average electric rates. Since this is only an inaugural study of a previously unstudied issue we will look to study electric costs between specific industries and find solutions to create positive economic growth. The results should be useful for policy decisions weighing the trade offs between “green” environmental efforts and the negative economic growth effects of higher electric prices.   Omar J. Borla, Director Center for Economic Policy and Analysis   Click below to see the chart


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