The economic cost of mandatory reduction of electricity demand: A CGE analysis of the Korean case

Abstract

In this paper, we used a CGE model featuring detailed energy sectors to estimate the economic costs of two alternative policies of reducing electricity consumption. The first policy is to increase the electricity tariffs by 10 percent across the board. The second policy is mandatory reduction of electricity consumption for large industrial customers, which impose the same reduction rate on all target users. The simulation results show that the latter has greater negative impact on the economy than the former. On annual basis, the former reduces real GDP by 0.062 percent and the latter by 0.085 percent when they both achieve the same overall power consumption reduction of 7.385 percent. These results confirm the principle that a market-based approach to balance supply and demand is more efficient than a command-and-control approach.