An Investigation into Dynamics, Elasticity and Asymmetry for Residential Natural Gas Markets

The role of price in determining the level of demand for conventional forms of energy, and how this impacts the development of renewable energy markets, has been widely debated in the literature. In this chapter, we explore these issues using an econometric model of energy demand to investigate short-run dynamics and long-run cointegrating relationships, as well as evidence of price and income asymmetry, for the US residential natural gas energy market. We use this same model to produce estimates of long-run price and income elasticity of demand.It is well established that energy demand estimation must allow for the dynamic behavior and decisions of energy consumers. Dynamics are important to understanding demand behavior because the long-run response of consumers to price changes is likely to differ from the short-run response. Specifically, long-run elasticities of demand are expected to be larger than short-run elasticities, which is unsurprising given that long-run adjustment of energy demand involves changes in long life assets such as cars and buildings. The lower short-run elasticities of demand makes sense because of the lack of available substitutes in the short-run.In this chapter, we show the reader one approach to estimating price and income elasticity, and how to test for short-run dynamics, long-run cointegrating relationships and evidence of price and income asymmetry. The information presented here is a valuable resource for market participants, market analysts and policy makers.