Analyzing the Impact of Economic Factors on the US Commercial Electricity Consumption

Abstract

This study delves into the demand dynamics for commercial electricity within the United States, with a particular emphasis on identifying the most appropriate functional form to represent this demand. Through a comprehensive analysis, the findings indicate that the linear-log model outperforms other functional forms such as log-log, linear, and log-linear models in explaining the variations in commercial electricity demand. Several key determinants significantly influence the demand for commercial electricity. The analysis reveals that real Gross Domestic Product (GDP) exerts a positive impact on electricity demand, indicating that as economic activity expands, the consumption of commercial electricity rises correspondingly. Additionally, the real price of commercial natural gas also has a positive effect, suggesting that as the cost of natural gas increases, businesses may switch to electricity as an alternative energy source. The inclusion of the lagged dependent variable in the model highlights the persistence of electricity consumption patterns over time, demonstrating that past consumption levels are a strong predictor of current demand. Conversely, the demand for commercial electricity is negatively impacted by the real own price of electricity. This inverse relationship suggests that higher electricity prices discourage consumption among commercial entities. This price sensitivity underscores the importance of pricing strategies and their potential impact on consumption behaviors. An important aspect of the study is the examination of elasticity measures over time. The long-run price elasticity of demand, which reflects the responsiveness of electricity consumption to changes in its price, has shown a declining trend. Similarly, income elasticity, which measures how demand responds to changes in real GDP, and cross-price elasticity, which indicates the relationship between the price of commercial natural gas and electricity demand, have also decreased in absolute values. This trend suggests that over time, commercial electricity consumption has become less sensitive to changes in price and income levels. The findings of this study have significant implications for policymakers and energy sector stakeholders. Understanding the factors that drive commercial electricity demand and how these factors interact over time is crucial for designing effective energy policies and pricing strategies. The declining elasticity values suggest that interventions aimed at influencing electricity demand through price mechanisms may need to be reevaluated, as their impact may not be as pronounced as in the past. Additionally, the positive relationship between natural gas prices and electricity demand highlights the potential for fuel substitution, which can inform strategies for energy diversification and sustainability.