ENERGY SHADOW VALUE AS A MARGINAL ECONOMIC MEASURE OF ENERGY EFFICIENCY: AN INTUITIVE AND THEORETICAL PERSPECTIVE

This paper uses a microeconomics perspective to derive an economically meaningful energy efficiency measure. We contribute to the literature by deriving the measure based on neoclassical economic theory. Energy intensity, the most frequently used energy efficiency measure, is a technical average measure drawn from the engineering-science perspective and is not derived from microeconomic foundations, based on marginal production concepts. We address the particular problems associated with this measure and, unlike the literature, introduce the energy shadow value as an economic marginal energy efficiency measure. We describe at least two methods to model the energy index and derive energy shadow value based on a dual profit function: a quasi-fixed approach, treating energy use as quasi-fixed factor; and a directly nested mark-down and up approach, nesting the energy shadow price into the profit function; we discuss which approach is most useful and appropriate to derive an explicit energy shadow value model. We conclude that quasi-fixed approach offers more advantages when deriving a dynamic energy efficiency measure. The paper addresses fallacies of using energy intensity measure and how the shadow value indicator can be applied to address international energy efficiency comparisons and impacting factors particularly capital, technology, and environmental obligations.