The Importance of Electricity for the Economy Model

Hoover dam from plane, color balance corrected...

Hoover dam (Photo credit: Wikipedia)

The Gross Domestic Product of a country is the result of different factors. As the complexity of the world increases, it is more difficult for governments to preserve a healthy state of the economy. If we want to analyze an economy, it is very useful to look at the drivers. In this article, I am going to put the focus on energy, specifically on electricity.

GDP

Graph 1 GDP at current prices of the main Euro economies, UK and the USA. Data Source OECD

Modern production requires energy, however, the GDP is the result of the integration of the production of different sectors. In some sectors, the importance of energy is not significantly related to production. For instance, a consultancy firm does not apply energy to provide its services except the required to turn on the lights of the office. In this case, the GDP of the sector is mainly a result of the workforce. It is true that computers (using electricity) can improve hugely the productivity of the employees, but if we distribute the added value proportionally to the cost of production factors, in this case workforce is more responsible of the added value than the energy.

In a modern industrial facility things are opposite, automated facilities can work with a few employees, and the energy required to transform the raw materials into products is provided by energy sources. The use of energy is a signal of modernity and development, a society with low use of energy cannot provide many products that are the support of a comfortable way of life for its citizens, independently that some sectors of the economy with high added value as engineering consultancy can work with a low consumption of electricity.

Electricity is important in order to measure the degree of development of a society because the manufacture of complex products usually requires a high degree of automation that is easily implemented with electric devices. There can be some reasons to take this affirmation carefully, because an excessive electricity generation can be a result of a non-efficient electricity system.

In order to illustrate this you can look at the following picture:

Electricity and GDP Main Euro Economies

Graph 2 Relationship between GDP and Electricity Production of the Main Euro economies. Data Source OECD

You can see that Italy and Germany are producing more with similar electricity consumption to France and Spain. This can show that the GDP of France and Spain are more electricity dependent than the German and Italian ones.

If we want to compare the larger economies and the littler ones it is necessary to use a different graph:

Electricity Production over GDP

Graph 3 Electricity Production over GDP of the main Euro economies, UK and USA. Data Source OECD

We can see more clearly how Spain and Germany have similar requirements of electricity for their production level.

The case of France is interesting to analyze. The great difference between the electricity generation of France and other European countries is due to its bet for nuclear energy instead of other energy sources. This is a good example of how a political decision in a technical field can finally define the economy model, and it can support firmly the need of technologists at the political level.

Additionally, I want to show you that there is not a perfectly linear relationship between GDP and Electricity.

Electricity and GDP USA

Graph 4 Relationship between GDP and Electricity Production of USA. Data Source OECD

External factors can affect electricity dependent and non-dependent sectors in different ways producing little or even large changes at the components of the GDP. This is common to other countries although the graph shown is only of USA.

If we look again at the third graph, we can see that there is a trend to reduce the dependency of the GDP from electricity generation. This can be due to different factors:

  • The last crises have produced an effort of all economies to be more efficient.
  • There has been a reduction of the prices of oil and gas that can be substitutive products at many industries.
  • The crisis has produced a change of the GDP components. For instance, in Spain there has been an improvement of tourism (service sector) at the expense of the industrial one.

A way to try to analyze if the energy sector is more efficient, is to look at the labor productivity. With a more efficient energy sector, the productivity of the labor factor should be increased.

Labor Productivity Improvement

Graph 5 Labor Productivity Improvement in percentage of the previous year. Data Source OECD

The only country that has improved its labor productivity from the crisis of 2007 every year has been Spain. There is not a reason to think that the reduction of electricity generation is due to a more efficient electricity system. Other factor should be more probable. In the case of Spain the improvement of labor productivity has been due to a reduction of the salary costs, and we cannot affirm that the electricity system is more efficient.

As usual for this section, I would like to indicate some issues in order that the readers can make some reflections:

  • The weight of electricity has been reduced for production. At first glance, this is not good from a technical viewpoint. As I said initially, there is a strong relationship between the development of a society and the use of electricity. This can be a signal of a stopped innovation. Great social projects of technical development are being forgotten with the crisis.
  • Spanish production is more similar to the German than to other ones in terms of energy use.
  • Spain is doing a great effort to improve its productivity, harder than the effort of other countries of the Euro Zone. It is the only country that has improved it among the main Euro economies and the UK, in the same way as USA, doing even harder efforts than USA.

 

 

 

 Azul Rojo 0003

 

Mr. Luis Díaz Saco

Executive President

saconsulting

advanced consultancy services

 

    Nowadays, he is Executive President of Saconsulting Advanced Consultancy Services. He has been Head of Corporate Technology Innovation at Soluziona Quality and Environment and R & D & I Project Auditor of AENOR. He has acted as Innovation Advisor of Endesa Red representing that company in Workgroups of the Smartgrids Technology Platform at Brussels collaborating to prepare the research strategy of the UE on the future Electricity Networks.

 

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