Purchase or Generate? An Analysis of Energy Consumption, Co-generation and Substitution Possibilities in Energy Intensive Manufacturing Plants under the Japanese Feed-in-Tariff

As the manufacturing industry is one of the largest contributors to global emissions, decarbonization of the production line is a key aspect in the fight against climate change. In this study, we examine the level of substitutability between fossil fuel and electricity. Using data on Japanese plants from 2004 to 2020, we estimate the elasticity of substitution between the two inputs, and find that a 1% increase in electricity prices results in a 6.55% increase in fossil fuel consumption. This is a unilateral form of substitution, as an increase in fossil fuel price does not translate in any significant changes in electricity consumption in the short-run. Our paper also contributes to explaining mechanisms behind inter-fuel substitution, with a special focus on electricity and fossil fuel through cogeneration. We find that substitutability is highly sector-dependent, and identify the pulp & paper, iron & steel, chemicals and cement to be sectors with substitution capacity. These sectors see an increase in their electricity generation, the magnitude of which is estimated between 0.004% (cement) to 0.23% (iron & steel). Iron & steel and cement also increase their consumption of coal to power generators by 0.06% and 0.005%, respectively.