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Measuring Energy Efficiency: An Application of LMDI Analysis to Power Sector in Kerala

Pillai N., Vijayamohanan (2019): Measuring Energy Efficiency: An Application of LMDI Analysis to Power Sector in Kerala.

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The traditional interest in energy efficiency has centred on a single energy input factor in terms of productivity that has become famous through the index method in terms of activity output per unit of energy use. The enquiry that has proceeded from the problems associated with this method has led to identifying the effect source of variation, in terms of decomposition analysis. A variant of factor decomposition analysis, index decomposition analysis takes energy as a single factor of production, and explores various effects on energy intensity changes, by decomposing these changes into pure intensity changes effect, structure changes effect and activity changes effect. The present paper seeks to measure energy efficiency in Kerala in terms of index decomposition analysis, using the Logarithmic Mean Divisia Index (LMDI) method. For the empirical exercise of decomposition, we consider two energy sectors of Kerala: power sector and petroleum sector. Since the petroleum consumption data is available only for the period from 2007-08 to 2016-17, we take this as our study period for the analysis. As the measure of activity, we have the usual real gross State domestic product (GSDP at 2011-12 prices). First we analyse the two sectors separately, and then the combined sector is analysed for decomposition. The petroleum consumption data relating only to the secondary and tertiary sub-sectors, the less-efficient petroleum sector is found to overweigh the combined energy sector of Kerala to such an extent that the energy-efficiency potential of these two sub-sectors gets clouded. A sufficiently high degree of energy efficiency in the petroleum sector can indeed reverse this anomaly.

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