This study by the Sectoral e-Business Watch is expected for June 2008.
Energy markets have seen major changes in recent years, driven mainly by market liberalisation, unbundling of vertically integrated industries, and the emergence of new (and often decentralised) energy technologies. At the same time the role of information and communications technologies (ICT) and e-business in shaping energy needs and behaviour has increased tremendously. ICT and e-business can help to reduce energy consumption and thus costs by reorganising production processes, but it can also lead to additional demand for energy due to new products and services provided.
Energy-intensive industrial businesses (such as chemicals and steel), for instance, may be able to raise revenues (and thus profitability) by trading self-generated surplus electricity as peak-power or reserve capacity on the (exchange-based) electricity spot market. In contrast, smaller firms and private households are enabled to cut on their energy bills by using new devices for visualising energy consumption by appliance, by differentiating tariffs by time-of-use, and by facilitating the switching among energy suppliers. The use of the Internet and wireless ICT (e.g. GSM, UMTS, Wimax, DSL) play an important role in this development. By means of ICT and related services, passive market participants can turn into active participants, offering significant potentials for the creation of value added from a whole range of new services and for making the markets more efficient.
The impact of the diffusion of ICT and e-Business on energy consumption (and hence also on air pollutant and greenhouse gas emissions) in ICT-using sectors is ambiguous, and depends on the relative magnitude of two countervailing forces: an income effect caused by the economic boost accruing from increased ICT use (increase in energy consumption) and a substitution effect caused by changes in the industrial structure and the capital stock towards higher productivity (decrease in energy consumption). Furthermore, there might also be some substitution of ICT and energy for labour.
The outcome of higher ICT use on energy consumption depends on a number of other factors as well, such as the industrial structure and the ex ante patterns of energy use. Takase and Murota (2004), for example, found that Japan could save energy by promoting ICT in the years to come, while further penetration of ICT in the U.S., where the substitution effect is already more pronounced, might actually increase energy use. Hence it is of great policy relevance to better understand whether and under what particular circumstances the promotion of ICT and e-Business can actually help to reduce energy consumption levels. Due to the heterogeneity of industrial structures and ICT diffusion patterns, such an analysis is likely most useful at the sectoral level.
Another important aspect is the impact of rising energy prices on the deployment of energy-efficient and energy-saving ICT applications, i.e. the innovativeness of the ICT manufacturing sector. In this context two aspects are of particular interest. First, it can be expected that due to rising energy prices (and thus costs), companies will increase their demand for ICT applications that support the efficient management of energy use. This will create a market for novel ICT tools (hard- and software), which will affect the overall cost of doing business and, as a result, firm performance. Energy price rises can be expected to spur the use of ICT that enable to reduce energy costs. As the growth in the ICT stock, together with rising energy prices, considerably increases the cost of doing business, ICT-using sectors can be expected to exercise pressure on the ICT-manufacturing sector to develop more efficient hardware. The existence of this feedback effect has already been confirmed in empirical research. According to Popp (2002), for example, energy prices and the quality of existing knowledge on the supply-side have strong positive effects on innovations. In short, the demand for ICT-enabled energy management tools and more energy-efficient applications will drive the technological progress in the ICT-producing sector. The feedback effect just mentioned will consequently have an influence on the competitiveness of both the ICT-using sectors and ICT manufacturers.
So far very little research has focused on quantitative analysis to determine the relationships between ICT usage and energy use. Qualitative studies have typically focused on the energy efficiency potentials, such as the project “eEnergy”. In contrast to these existing and mainly analytical-descriptive studies, this research wants to empirically test several hypotheses derived from economic theory. In essence the motivation for undertaking this kind of analysis is twofold:
The prime motivation is to determine which effect dominates in the European industries, an issue of great importance in light of global climate change, other environmental problems, and concerns about future energy supply security. The analysis focuses on the energy consumption changes induced by the spreading of ICT in ICT-using sectors. It is often claimed that the diffusion of ICT drastically increased energy consumption. For instance, in 2006, businesses world-wide spent approximately $55 billion on new servers. To power and cool those machines they spent $29 billion, almost one half of the cost of the equipment itself. One of the questions arising in this context is whether the energy efficiency increases that accrue from the use of this modern equipment compensates for higher energy consumption that arises from the use of additional (new and/or more numerous) equipment.
A second motivation for the analysis is to study the impact of changes in energy price. Particularly, it is interesting to investigate the relative and the combined impact of ICT and e-business diffusion and energy prices on energy consumption of ICT-using industries, and also to study the extent to which the spreading of ICT and e-business in the sectors studied are able to affect the price responsiveness of energy demand.
In this on-demand study we aim at theoretically and empirically investigating the above-mentioned issues. The empirical work will be guided by the availability of data and appropriate econometric model specifications that allow for the testing of various hypotheses derived from the theoretical considerations.
The following specific topics will be addressed in this on-demand research:
Current state-of-the-art of research on ICT & energy use will be taken as a starting point. A set of theory-guided hypotheses regarding ICT impact on the above mentioned energy-related factors will be formulated and tested econometrically. The next task will then be to collect data that can be used for econometric modelling, and after that to proceed with the actual estimation of the models. After model estimation is completed, model specification tests will be performed in order to check the models’ accuracy and performance (e.g. in terms of the robustness of the results). If the diagnostics are satisfactory, hypothesis testing and the assessing of the validity of the theoretical predictions can follow. Finally, the outcomes of the empirical analyses will be used for making predictions and deriving policy implications.
A thorough assessment of the above outlined interrelationships between ICT and energy usage requires an appropriate methodological design of the empirical analysis. In order to cover all relevant aspects of the consequences of ICT usage on energy consumption patterns, the empirical examination should concentrate on sector-specific characteristics regarding the use of ICT, and take into account other factors as well that facilitate ICT-driven changes in energy use (concerning both stock of energy-using appliances and utilisation patterns) and resulting dynamics.
The impact of ICT on energy use is closely linked to the extent to which different ICT applications have spread across different industries. This is partly so because ICT is a network technology (i.e. the more people or entities use ICT, the larger the accruing benefits tend to be). Consequently, despite the fact that a single firm is interested in the benefits it can derive individually from the use of ICT, high levels of ICT usage in one industry may lead to positive externalities at the sectoral level. Furthermore, industry-specific factors determine the speed of ICT diffusion, the type of applications being adopted, and the benefits that can be reaped in the short and the longer term (e.g. energy-intensive industries can be expected to enjoy larger benefits from adopting ICT to better manage energy use). Consequently, sectoral characteristics influence not only the intensity of ICT and energy use, but the economic impact of ICT and eventual energy consumption patterns as well. This clearly calls for a disaggregated (sectoral) level of analysis, as it is envisaged in the Sectoral e-Business Watch project.
An important problem of determining the impact of ICT on energy use is related to the fact that the use of ICT influences firm performance primarily when accompanied by other changes and investments, which are not necessarily classified as such. This includes, for example, investments in skills, organisational arrangements, or the availability of external expertise. Another factor contributing to the positive impact of ICT usage is that it fosters innovation of the adopting firms. Users often help make investment in ICT more valuable through their own experimentation and invention. Without this process of co-invention, which often has a slower pace than technological innovation, the economic impact of ICT and its impact on energy consumption would be more limited. Moreover, learning-by-using can lead to important improvements of the technology. Thus, the analysis will not only focus on the diffusion of ICT with respect to energy use, but will aim to account for factors accompanying the process of ICT adoption. Particular emphasis will be placed on skill development and organisational change.
Results from recent empirical research suggest that the returns to ICT investments usually do not occur immediately, but only with significant time lags. For example, computers make a positive and significant contribution to output growth at the firm level, but the implied returns tend to increase over time, suggesting that time-intensive complementary investments into organisational restructuring have to be undertaken as well. Moreover, the potential of ICT to increase factor productivity and operational efficiency, and in particular concerning energy use, does not remain constant. The positive effects are particularly strong in the early times of technology use and tend to diminish. Reasons include the fact that system optimisation is often not done on a continuous basis, but only when major changes occur, leading to gradual losses in system efficiency. Thus, the adoption of a particular technology is a step in levels, rather than a permanent increase in the rate of growth. Consequently, the analysis performed will to a certain extent also have to account for the dynamics of the ICT-driven change.
The analytical techniques, which will be considered for their suitability to assess the impact of ICT and e-Business on energy use, include the following:
Apart from choosing an appropriate econometric model formulation, one has to use a comprehensive and consistent set of data. The analysis covered by this on-demand report will be mainly based on ICT, energy and economic statistics collected and provided by Eurostat.
