Electricity Exposure and Firm Investment: Evidence from Portuguese Manufacturing

This paper examines the relationship between electricity exposure and firm-level investment dynamics in Portugal over the period 2006–2023. Using comprehensive administrative microdata covering the universe of manufacturing firms, we construct a firm-level measure of electricity intensity defined as electricity expenditure relative to sales and estimate fixed-effects panel regressions exploiting within-firm variation over time. We document three main findings. First, electricity intensity is robustly and negatively associated with investment: firms that are more dependent on electricity inputs exhibit systematically lower capital accumulation, conditional on firm characteristics and macroeconomic conditions. Second, the elasticity between electricity use and investment weakens during the period of elevated electricity price volatility beginning in 2021, indicating a dampening of capital formation responsiveness under heightened input cost uncertainty. Third, firms classified as energy-intensive under the European Commission’s 3 percent regulatory threshold do not exhibit statistically significant differences in investment dynamics during the post-2021 period.The results suggest that investment behavior varies along a continuous exposure margin rather than across binary regulatory classifications. Overall, the findings highlight the importance of granular firm-level measures of electricity dependence in understanding capital accumulation patterns during periods of energy market volatility.