Thursday, March 4, 2010

Electricity Prices - cause or effect?

It is not uncommon to see regular commentary on how low electricity prices are necessary for productivity and economic growth. Now obviously everybody wants what they want to be cheap (well actually they probably want it to be free but most people recognise that anything worth having will have a cost). When it comes to electricity prices, though, it would seem that they are more of an indicator of wealth than a causal input.

There are certainly many energy intensive industries where the cost of electricity (or other energy forms) is a major factor in their viability. Some of these businesses can be quite large and so their total economic contribution can be significant. Nevertheless, their value add to the economy (sales in excess of costs) is relatively small. In other words if your economy relied entirely on these industries you wouldn't be very rich (someone would be, of course, but not many people).

For most businesses (and most economies) energy costs are a relatively small cost in the economy; and most of this cost is transport. Electricity (and with most other utilities added in) will usually be well less than about 3% of an economy's input costs. This tends to mean that economic growth is not significantly effected by the price of electricity. However, most businesses rely heavily upon the electric energy service.

There are a signifcant number of factors that affect the relative electricity costs between nations but, all things being equal, low electricity prices tell you two things. First, demand is relatively low and, second, (prima facie) so is the willingness to pay. Another way of looking at this is that such a nation isn't doing very much and isn't making a lot from not doing it. Alternatively a nation with high electricity prices (certus paribus - everything else being equal) has high demand and high willingness to pay, ie doing much and earning much.

Now I am not trying to say that a nation is better off with high electricity prices - obviously the same service for less cost is always better - the point is that electricity prices are a better indicator of wealth than they are a causer of wealth. If you have low electricity prices (certus paribus) then you probably aren't very wealthy; and if you desperately want them to be lower then your wealth prospects aren't good.

Here is the truism; infrastructure does not trigger growth by itself (it can impede growth but it can't trigger it). New Zealand does not have poor economic growth because of low investment in infrastructure, New Zealand has low investment in infrastructure because it has poor economic growth. When an economy is booming and infrastructure is impeding growth then infrastructure gets built very quickly. When infrastructure is built slowly the implication is clear. You're worried about whether you can afford it; and if this is the reality then you should be concerned about whether you can afford it (and whether your children and grandchildren can afford it).

We should hope and aspire for many things. The highest academic and skills based achievement of our children, plentiful resources, technological leadership, cultural harmony, law and order. I wouldn't spend too much effort hoping for low electricity prices, we just might get them.

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