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Possibility for hedging from price increases in residential energy demand

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  • Bente Halvorsen
  • Bodil M. Larsen

    ()
    (Statistics Norway)

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    Abstract

    Liberalisation of the Norwegian electricity market has given more short-term variation in the electricity price. Since almost three quarters of Norwegian households have heating equipment using more than one energy carrier, we would expect them to be able to hedge from price increases and benefit from low prices by switching between energy carriers. In many studies estimates of the cross price derivatives in Norwegian residential energy consumption give a negative sign. The question is whether hedging is possible despite this negative sign, that is, if energy goods are alternatives and not separable in consumption. To answer this question, we estimate a conditional demand model on a sample of 2438 households to decompose the cross price derivatives. We find that the negative cross price derivatives are mainly due to budget effects. We also reject the hypothesis of weak separability, indicating that Norwegian households are able to hedge from energy price variations.

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    Bibliographic Info

    Paper provided by Research Department of Statistics Norway in its series Discussion Papers with number 347.

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    Date of creation: Apr 2003
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    Handle: RePEc:ssb:dispap:347

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    Keywords: Residential energy demand; empirical microanalysis; separability test;

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    1. Browning, Martin & Meghir, Costas, 1991. "The Effects of Male and Female Labor Supply on Commodity Demands," Econometrica, Econometric Society, vol. 59(4), pages 925-51, July.
    2. Blackorby, Charles & Primont, Daniel & Robert Russell, R., 1977. "Separability vs functional structure: A characterization of their differences," Journal of Economic Theory, Elsevier, vol. 15(1), pages 135-144, June.
    3. Pollak, Robert A, 1969. "Conditional Demand Functions and Consumption Theory," The Quarterly Journal of Economics, MIT Press, vol. 83(1), pages 60-78, February.
    4. Halvorsen, Bente & Larsen, Bodil M., 2001. "The flexibility of household electricity demand over time," Resource and Energy Economics, Elsevier, vol. 23(1), pages 1-18, January.
    5. E. Raphael Branch, 1993. "Short Run Income Elasticity of Demand for Residential Electricity Using Consumer Expenditure Survey Data," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 111-122.
    6. Blackorby, Charles & Davidson, Russell & Schworm, William, 1991. "Implicit separability: Characterisation and implications for consumer demands," Journal of Economic Theory, Elsevier, vol. 55(2), pages 364-399, December.
    7. Baker, Paul & Blundell, Richard & Micklewright, John, 1989. "Modelling Household Energy Expenditures Using Micro-data," Economic Journal, Royal Economic Society, vol. 99(397), pages 720-38, September.
    8. Baker, Paul & Blundell, Richard, 1991. "The Microeconometric Approach to Modelling Energy Demand: Some Results for UK Households," Oxford Review of Economic Policy, Oxford University Press, vol. 7(2), pages 54-76, Summer.
    9. Blackorby, Charles, et al, 1970. "Homothetic Separability and Consumer Budgeting," Econometrica, Econometric Society, vol. 38(3), pages 468-72, May.
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    Cited by:
    1. Claudio A Agostini & Cecilia Plottier & Eduardo Saavedra, 2011. "La Demanda Residencial por Energía Eléctrica en Chile," Working Papers wp_013, Adolfo Ibáñez University, School of Government.
    2. Rijo John, 2006. "Crowding-out effect of tobacco expenditure and its implications on intra-household resource allocation," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2006-002, Indira Gandhi Institute of Development Research, Mumbai, India.

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