IDEAS home Printed from https://ideas.repec.org/p/sur/seedps/147.html
   My bibliography  Save this paper

Economic Modelling of Energy Services: Rectifying Misspecified Energy Demand Functions

Author

Listed:
  • Lester C Hunt

    () (Surrey Energy Economics Centre (SEEC), School of Economics, University of Surrey.)

  • David L Ryan

    () (Department of Economics, University of Alberta, Edmonton, Canada.)

Abstract

Although it is well known that energy demand is derived, since energy is required not for its own sake but for the energy services it produces – such as heating, lighting, and motive power – energy demand models, both theoretical and empirical, rarely take account of this feature. In this paper we highlight the misspecification that results from ignoring this aspect, and its empirical implications – biased estimates of price elasticities and other measures – and provide a relatively simple and empirically practicable way to rectify it, which has a strong theoretical grounding. To do so, we develop an explicit model of consumer behaviour in which utility derives from consumption of energy services rather than from the energy sources that are used to produce them. As we discuss, this approach opens up the possibility of examining many aspects of energy economics in a theoretically sound way that has not previously been considered on a widespread basis, although some existing empirical work could be interpreted as being consistent with this type of specification. While this new formulation yields demand equations for energy services rather than for energy or particular energy sources, these are shown to be readily converted, without added complexity, into the standard type of energy demand equation(s) that is (are) typically estimated. The additional terms that the resulting energy demand equations include, compared to those that are typically estimated, highlights the misspecification that is implicit when typical energy demand equations are estimated. A simple solution for dealing with an apparent drawback of this formulation for empirical purposes, namely that information is required on typically unobserved energy efficiency, indicates how energy efficiency can be captured in the model, such as by including exogenous trends and/or including its possible dependence on past energy prices. The approach is illustrated using an empirical example that involves estimation of an aggregate energy demand function for the UK with data over the period 1960 – 2011.

Suggested Citation

  • Lester C Hunt & David L Ryan, 2014. "Economic Modelling of Energy Services: Rectifying Misspecified Energy Demand Functions," Surrey Energy Economics Centre (SEEC), School of Economics Discussion Papers (SEEDS) 147, Surrey Energy Economics Centre (SEEC), School of Economics, University of Surrey.
  • Handle: RePEc:sur:seedps:147
    as

    Download full text from publisher

    File URL: http://www.seec.surrey.ac.uk/Research/SEEDS/SEEDS147.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Bentzen, Jan & Engsted, Tom, 1993. "Short- and long-run elasticities in energy demand : A cointegration approach," Energy Economics, Elsevier, vol. 15(1), pages 9-16, January.
    2. John Dimitropoulos & Lester Hunt & Guy Judge, 2005. "Estimating underlying energy demand trends using UK annual data," Applied Economics Letters, Taylor & Francis Journals, vol. 12(4), pages 239-244.
    3. Hunt, Lester C. & Judge, Guy & Ninomiya, Yasushi, 2003. "Underlying trends and seasonality in UK energy demand: a sectoral analysis," Energy Economics, Elsevier, vol. 25(1), pages 93-118, January.
    4. Kenneth Gillingham & Richard G. Newell & Karen Palmer, 2009. "Energy Efficiency Economics and Policy," Annual Review of Resource Economics, Annual Reviews, vol. 1(1), pages 597-620, September.
    5. John M. Quigley, 1984. "The Production of Housing Services and the Derived Demand for Residential Energy," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 555-567, Winter.
    6. Massimo Filippini & Lester C. Hunt, 2011. "Energy Demand and Energy Efficiency in the OECD Countries: A Stochastic Demand Frontier Approach," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 59-80.
    7. Haas, Reinhard & Nakicenovic, Nebojsa & Ajanovic, Amela & Faber, Thomas & Kranzl, Lukas & Müller, Andreas & Resch, Gustav, 2008. "Towards sustainability of energy systems: A primer on how to apply the concept of energy services to identify necessary trends and policies," Energy Policy, Elsevier, vol. 36(11), pages 4012-4021, November.
    8. Schleich, Joachim & Mills, Bradford & Dütschke, Elisabeth, 2014. "A brighter future? Quantifying the rebound effect in energy efficient lighting," Energy Policy, Elsevier, vol. 72(C), pages 35-42.
    9. Dermot Gately & Hiliard G. Huntington, 2002. "The Asymmetric Effects of Changes in Price and Income on Energy and Oil Demand," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 19-55.
    10. Goerlich, Roland & Wirl, Franz, 2012. "Interdependencies between transport fuel demand, efficiency and quality: An application to Austria," Energy Policy, Elsevier, vol. 41(C), pages 47-58.
    11. Adeyemi, Olutomi I. & Broadstock, David C. & Chitnis, Mona & Hunt, Lester C. & Judge, Guy, 2010. "Asymmetric price responses and the underlying energy demand trend: Are they substitutes or complements? Evidence from modelling OECD aggregate energy demand," Energy Economics, Elsevier, vol. 32(5), pages 1157-1164, September.
    12. Ryan, David L. & Plourde, Andre, 2002. "Smaller and smaller? The price responsiveness of nontransport oil demand," The Quarterly Review of Economics and Finance, Elsevier, vol. 42(2), pages 285-317.
    13. Richard B. Howarth, 1997. "Energy Efficiency And Economic Growth," Contemporary Economic Policy, Western Economic Association International, vol. 15(4), pages 1-9, October.
    14. Roger Fouquet & Peter J.G. Pearson, 2012. "The Long Run Demand for Lighting:Elasticities and Rebound Effects in Different Phases of Economic Development," Economics of Energy & Environmental Policy, International Association for Energy Economics, vol. 0(Number 1).
    15. Roger Fouquet, 2014. "Editor's Choice Long-Run Demand for Energy Services: Income and Price Elasticities over Two Hundred Years," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 8(2), pages 186-207.
    16. Adolf Buse, 1994. "Evaluating the Linearized Almost Ideal Demand System," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 76(4), pages 781-793.
    17. repec:hal:gemwpa:hal-00991732 is not listed on IDEAS
    18. Sorrell, Steve & Dimitropoulos, John, 2008. "The rebound effect: Microeconomic definitions, limitations and extensions," Ecological Economics, Elsevier, vol. 65(3), pages 636-649, April.
    19. Prosser, Richard D., 1985. "Demand elasticities in OECD : Dynamical aspects," Energy Economics, Elsevier, vol. 7(1), pages 9-12, January.
    20. Lester C. Hunt & Guy Judge & Yasushi Ninomiya, 2003. "Modelling underlying energy demand trends," Chapters,in: Energy in a Competitive Market, chapter 9 Edward Elgar Publishing.
    21. Haas, Reinhard & Schipper, Lee, 1998. "Residential energy demand in OECD-countries and the role of irreversible efficiency improvements," Energy Economics, Elsevier, vol. 20(4), pages 421-442, September.
    22. Kouris, George, 1983. "Energy consumption and economic activity in industrialized economies--a note," Energy Economics, Elsevier, vol. 5(3), pages 207-212, July.
    23. Nathan W. Chan & Kenneth Gillingham, 2015. "The Microeconomic Theory of the Rebound Effect and Its Welfare Implications," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 2(1), pages 133-159.
    24. Lester C. Hunt & Guy Judge & Yasushi Ninomiya, 2003. "Modelling underlying energy demand trends," Chapters,in: Energy in a Competitive Market, chapter 9 Edward Elgar Publishing.
    25. Jeffrey A. Dubin & Allen K. Miedema & Ram V. Chandran, 1986. "Price Effects of Energy-Efficient Technologies: A Study of Residential Demand for Heating and Cooling," RAND Journal of Economics, The RAND Corporation, vol. 17(3), pages 310-325, Autumn.
    26. James M. Griffin & Craig T. Schulman, 2005. "Price Asymmetry in Energy Demand Models: A Proxy for Energy-Saving Technical Change?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 1-22.
    27. Harvey, Andrew, 1997. "Trends, Cycles and Autoregressions," Economic Journal, Royal Economic Society, vol. 107(440), pages 192-201, January.
    28. Beenstock, Michael & Wilcocks, Patrick, 1983. "Energy and economic activity: a reply to Kouris," Energy Economics, Elsevier, vol. 5(3), pages 212-212, July.
    29. Fouquet, Roger, 2014. "Long run demand for energy services: income and price elasticities over two hundred years," LSE Research Online Documents on Economics 59070, London School of Economics and Political Science, LSE Library.
    30. I.O. Walker & Franz Wirl, 1993. "Irreversible Price-Induced Efficiency Improvements: Theory and Empirical Application to Road Transportation," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 183-205.
    31. Huntington, Hillard G., 2010. "Short- and long-run adjustments in U.S. petroleum consumption," Energy Economics, Elsevier, vol. 32(1), pages 63-72, January.
    32. Adofo, Yaw Osei & Evans, Joanne & Hunt, Lester Charles, 2013. "How sensitive to time period sampling is the asymmetric price response specification in energy demand modelling?," Energy Economics, Elsevier, pages 90-109.
    33. Beenstock, M. & Willcocks, P., 1981. "Energy consumption and economic activity in industrialized countries : The dynamic aggregate time series relationship," Energy Economics, Elsevier, vol. 3(4), pages 225-232, October.
    34. Deaton, Angus S & Muellbauer, John, 1980. "An Almost Ideal Demand System," American Economic Review, American Economic Association, vol. 70(3), pages 312-326, June.
    35. Lester C. Hunt & Robert Witt, 1995. "An Analysis of UK Energy Demand Using Multivariate Cointegration," Surrey Energy Economics Centre (SEEC), School of Economics Discussion Papers (SEEDS) 86, Surrey Energy Economics Centre (SEEC), School of Economics, University of Surrey.
    36. Lester C Hunt & David L Ryan, 2014. "Catching on the Rebound: Why Price Elasticities are Generally Inappropriate Measures of Rebound Effects," Surrey Energy Economics Centre (SEEC), School of Economics Discussion Papers (SEEDS) 148, Surrey Energy Economics Centre (SEEC), School of Economics, University of Surrey.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. repec:gam:jsusta:v:10:y:2018:i:2:p:469-:d:131188 is not listed on IDEAS
    2. Roger Fouquet, 2017. "Consumer surplus from energy transitions," GRI Working Papers 277, Grantham Research Institute on Climate Change and the Environment.
    3. Rowland, Christopher S. & Mjelde, James W. & Dharmasena, Senarath, 2017. "Policy implications of considering pre-commitments in U.S. aggregate energy demand system," Energy Policy, Elsevier, vol. 102(C), pages 406-413.
    4. Gioele Figus & J Kim Swales & Karen Turner, 2017. "Can a reduction in fuel use result from an endogenous technical progress in motor vehicles? A partial and general equilibrium analysis," Working Papers 1705, University of Strathclyde Business School, Department of Economics.
    5. Atalla, Tarek N. & Hunt, Lester C., 2016. "Modelling residential electricity demand in the GCC countries," Energy Economics, Elsevier, vol. 59(C), pages 149-158.
    6. Lester C Hunt & David L Ryan, 2014. "Catching on the Rebound: Why Price Elasticities are Generally Inappropriate Measures of Rebound Effects," Surrey Energy Economics Centre (SEEC), School of Economics Discussion Papers (SEEDS) 148, Surrey Energy Economics Centre (SEEC), School of Economics, University of Surrey.

    More about this item

    Keywords

    Modelling Energy Services Demand; Energy Efficiency; Energy Demand Function Misspecification.;

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sur:seedps:147. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mona Chitnis). General contact details of provider: http://edirc.repec.org/data/eesuruk.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.