Modelling the energy demand of households Kurt Kratena, Ina Meyer, Michael Wueger

1. Modelling the energy demand of households Kurt Kratena, Ina Meyer, Michael Wueger WIFO (Austrian Institute of Economic Research)

2. Demand system with stocks and‚service prices‘ Expenditure function for non-durables with utility (u) and prices (pi) + Expenditure for durablesI with price (pI) Main features: Appliance stocks  energy efficiency Dealing with “service prices” and demand (‘rebound’ effect !) Combining time series & cross section estimation

3. Demand system with stocks and‚service prices‘ Converting energy flow (E) into service (S): Impact of the efficiency parameter (hES) on the ‘real price of service’ Budget shares = service shares

4. Demand system with stocks and‚service prices‘ Optimality conditions for cost minimizing: Shephard’s Lemma envelope condition Impact of capital stock on expenditure given by efficiency improvement-effect: : technical progress & consumers’ choice

5. Impact of stock (changes) on efficiency : technical progress & consumers’ choice ADL-model with long run elasticity of efficiency wrt. to energy prices (consumers choice) and capital stock (autonomous/embodied technical progress) Elasticities:

6. Almost Ideal Demand System (AIDS) or Quadratic AIDS for C(u, pi) Budget share of AIDS Budget share of QUAIDS Restrictions

7. AIDS model for C(u, pi) Elasticities 1. Income elasticities (direct derivation) 2. Price elasticities General: hij,COMP = hij,UNCOMP + hiwj (Slutsky equation) hij,COMP …compensated price elasticity hij,UNCOMP …uncompensated price elasticity.

8. AIDS model for C(u, pi) Elasticities 2a. Uncompensated price elasticity where dij is the Kronecker delta and dij = 1 for i = j and dij= 0 for i ≠ j. 2b. Compensated price elasticity

9. Quadratic AIDS model for C(u, pi) Elasticities 1. Differentiate wi wrt. to C and pj :

10. The Quadratic AIDS model Elasticities 2. Derive elasticities fromm’s : Income elasticity Uncompensated price elasticity wheredijis the Kronecker delta anddij= 1 for i = j anddij= 0 for i ≠ j. General:hij,COMP = hij,UNCOMP + hiwj (Slutsky equation)

11. Dynamics of energy demand (Ei) Totally differentiating E wrt. time (t) Direct effect & indirect effect via service demand. Total impact: Direct (price induced-price) rebound effect Indirect (price induced-income) rebound effect

12. Empirical application Austria (1990 – 2006) USA (1972 – 2005) Austria (1990 – 2006) & Household Budget Survey 2004/05 -National Accounts (private consumption, COICOP) Efficiency of household appliances: Refrigerators, freezers, washing machines, dish washers, TVs, dryers, heating, water heating and cooking (National Lawrence Berkeley Laboratory, ODYSSEE database) Efficiency of private car fleet

13. Efficiency, Austria

14. Efficiency, Austria

15. Efficiency, Austria

16. Efficiency, U.S.

17. Efficiency, U.S.: energy & service price

18. Efficiency, U.S.: energy & service price

19. Efficiency, U.S.: energy & service price

20. Estimation results: price elasticities, Austria

21. Empirical results: Austria Rebound effects: Gasoline: 50%, heating fuels: 20%, electricity: 10%, range in the literature: 10% - 30%. Pure income rebound effects: Gasoline: -1.9%, heating fuels: 6.6%, electricity: 2%. Decomposing energy demand: Further decomposition of dS/S into: price rebound, income rebound, other factors

22. Decomposition: Austria

23. Estimation results: price elasticities, U.S.

24. Empirical results: U.S. Rebound effects: Gasoline: 16%, heating fuels: 21%, electricity: 8%, range in the literature: 10% - 30%. Pure income rebound effects: electricity 9.4 %. Long-run elasticity of efficiency

25. Simulation results: U.S. (long run change in energy prices and capital stocks)

26. Conclusions Rebound effects: main link between top down and bottom up modelling Efficiency has only a limited impact on energy demand during low energy price-periods  service demand is the driver of energy demand Long run impact of prices exceeds short run impact by far