Electricity Prices and Energy Efficiency - A Regression Discontinuity Approach

Abstract: This study analyzes the relationship between electricity prices and energy efficiency in German companies. Economic theory suggests that higher energy prices will lead to higher energy efficiency. This paper tests this hypothesis empirically by analyzing company-level data from Germany. In particular, a special provision of the German Renewable Energy Act (REA) is exploited. According to this provision, some companies are exempted from paying the “REA markup” - a markup charged on the electricity price in order to finance subsidies for renewable energy. Exempted companies pay lower electricity prices and can therefore be used as a counterfactual in a regression discontinuity analysis. The results of the analysis suggest that energy prices have a statistically significant and positive effect on energy efficiency.