The effects of an increase in power rate on energy demand and output price in Korean manufacturing sectors

In Korea, price subsidies for industrial power are provided by the government in order to enhance industrial competitiveness and curb inflation. However, this repeatedly causes electricity shortages in the peak summer and winter seasons because of over-consumption. Forcing a decline in the demand for electricity by raising power rates would thus help prevent a national blackout, lowering dependence on foreign energy and reducing CO2 emissions cost-effectively. This paper simulates the effects of a rise in power rate on demand for electricity and output price by estimating a restricted cost function, in which the quantity of raw materials is set to its cost-minimizing level, jointly with an inverse supply relation for the top three electricity-intensive manufacturing sectors. The empirical results indicate that a 10% increase in electricity rate would result in 8.0–10.1% less demand across all three manufacturing sectors, ceteris paribus. The impact on output price is of little statistical significance in the basic metals sector, while output price on average falls by 0.16% in the TV and communication equipment sector.