Determining Demand for Energy Services: Investigating income-driven behaviours

By Chantal Guertin, Subal C. Kumbhakar, Anantha K. Duraiappah on May 4, 2003
ABSTRACT: Conventional residential energy demand models are concerned with estimating fuel use (for example, gas, electricity and oil) demand. In this paper, we propose a residential energy demand model that is based on the demand for energy services, namely space heating load, water heating load, and appliance and lighting load. The model is developed using Canadian household data. We estimate the demand for energy services using a two-step estimation procedure. In the first step we compute the efficiencies for furnaces and water heaters for each of the 440 households using a deterministic frontier analysis. In the second step, the estimated furnace and water heater efficiencies are used to determine the demand for energy services. Price elasticities are expressed as a linear function of income to highlight income-related behaviour. Despite limitations with the database, the results show a clear variation in behavioural responses to changes in price and in income across the income groups and energy services. Low-income households are more responsive to price and income changes than higher-income households, while all households are more responsive to price changes than income changes. Space heating load presents the strongest distributional effect with a factor two between price elasticities of the low- and high-income groups. Results also confirmed the rebound effect with respect to the efficiency of furnaces and water heaters. This effect is quite noticeable with furnace efficiency. We used the rebound effect to design a policy that could help lower-income groups cope with increases in energy prices.

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IISD, 2003