Price and Income Elasticities of Industrial Energy Demand in New EU Member States

We analyze the determinants of industrial energy demand in five new European Union member states (Czechia, Lithuania, Poland, Romania, and Slovenia) with a focus on the effects of energy prices, sectoral output, energy-saving investment, and technological progress. Using a panel dataset covering 16 industrial sectors over more than two decades (1995-2018), we employ advanced estimation approaches employed in related literature to address issues of heterogeneity, cross-sectional dependence, and persistence, often overlooked in studies relying solely on fixed effects. Our empirical results show that output levels and energy prices consistently drive energy consumption, with their effects amplified when cross-correlations are accounted for. From our preferred estimation procedure (Dynamic Common Correlated Effects - Mean Group), we obtain evidence of intuitively relevant values: the energy price elasticity is -0.42, and the output elasticity is 0.32. Energy demand exhibits moderate levels of persistence, showing that past consumption patterns drive current energy consumption. Energy-saving investments tend to increase energy use, as they often accompany industrial growth or modernization, whereas research and development show only a limited effect. These findings provide valuable insights to policymakers on energy solutions to influence energy demand and mitigate the pressures of industrial growth.