Applied Theory of Energy Substitution in the Southeast: An SUR Approach

Issues on energy have recently dominated the economic decisions of several states across the U.S. economy and states in the southeastern region of U.S. are no exception. Almost all the states in the southeast import virtually all of their fuel resources from the Gulf Coast representing an annual financial diversion of several billions of dollars some of which could be used to develop domestic, alternative energy resources. The focus of this study was to determine the potential substitution between renewable energy and conventional energy forms in the southeast of U.S. We developed a system of factor share equations using translog cost function. The system of equations was estimated using a pooled iterative Non-linear Seemingly Unrelated Regression (SUR) procedure with homogeneity and symmetry restrictions imposed. Findings indicate that factor demands in the southeast energy sector are price inelastic and there is limited substitution potential when energy prices rise in fuel production. The substitution potential of renewable energy for the conventional energy forms is found to be higher than that of other conventional energy forms for renewable except renewable energy for natural gas. The substitution of renewable energy for natural gas is technically infeasible since the elasticity is negative. Since renewable energy has the potential to substitute for other forms of energy besides natural gas, federal and state governments might want to reverse the $10 billion petroleum subsidy versus the current $5 billion for renewable if the target (36 billion gallons of renewable fuel by 2022) set by 2007 Energy Independence Act is to be realized.