The demand for residential, industrial and total electricity, 1973–1998

doi:10.1016/S0140-9883(03)00033-1

Energy Economics

Volume 26, Issue 1, January 2004, Pages 87-100

https://doi.org/10.1016/S0140-9883(03)00033-1 Get rights and content

Abstract

This paper estimates residential, industrial, and total electricity demand by a partial-adjustment approach and by a simultaneous equation approach. Simultaneous equation models are more appropriate since they provide negative price elasticity estimates for the residential, industrial and total electricity samples. Flow-adjustment models yield positive price elasticity estimates in some cases, suggesting they fail to identify proper supply considerations that may be influencing prices. The simultaneous equation approach suggests that residential customers are more price sensitive than industrial customers. Weather seems to have the greatest impact on the residential sector, and cold weather appears to affect demand more than hot weather.

Introduction

This paper estimates residential, industrial, and total electricity demand by a partial-adjustment approach and by a simultaneous equation approach. Section 2 very briefly reviews the relevant literature dealing with electricity demand estimation such as appliance stock models, aggregation problems, flow-adjustment models, the use of expected vs. actual prices, the effects of block-pricing, how to deal with the simultaneity between price and quantity, the appropriate functional form, which relevant variables should be included in the regression, and it describes the simultaneous equation approach. This paper determines whether the flow-adjustment or simultaneous equation approach yields results consistent with microeconomic theory: namely, that the price and income elasticities have the proper sign. Section 3 outlines the models that are used to estimate residential and industrial electricity demand. Section 4 provides the empirical results, and the conclusions appear in Section 5.

Section snippets

Theoretical framework and very brief literature review

Electricity is demanded for operation of appliances or machines that provide a service to the electricity consumer. Many of these machines and appliances are long-lived. Consumers can adjust to electricity prices in two ways. They can either (1) change the utilization of the current machines and appliances, or (2) decide to purchase newer, more energy-efficient durable goods. Since the demand for electricity is an indirect result of machine and appliance usage, short-run variations in the

The model

The previous literature review has provided some suggestions on how to construct the electricity demand equation. Since electricity-using appliances are durable goods, appliance stock levels must be accounted for either explicitly or implicitly. Since appliance stock data are difficult to find, the implicit approach is preferred. We use the flow-adjustment model adopted by Houthakker and Taylor (1970).

Since appliances are durable goods, a consumer's decision to purchase is more likely based on

Residential electricity flow-adjustment model

The flow-adjustment residential electricity parameter estimates are compared to the simultaneous equation residential electricity parameter estimates. We use US aggregates involving 26 years of annual data from 1973 to 1998.³ The residential flow-adjustment model has the form $ln q ̂_{t} = Φ α_{0} + Φ α_{1} ln X ̂_{t} + Φ α_{2} 1.005 ln P ̂_{t} + Φ α_{3} ln G ̂_{t} + Φ α_{4} 1 X ̂_{t} + Φ α_{5} 1 1.005 P ̂_{t} + Φ α_{6} 1 G ̂_{t} + Φ α_{7} H_{t} + Φ$

Appropriate model

Based on the results shown in Table 1, Table 2, Table 3, Table 4, Table 5, Table 6, some inferences can be made regarding the appropriateness of flow-adjustment vs. simultaneous equation models, sectoral price elasticities, and sectoral responses to weather fluctuations. Simultaneous equation models seem to be more appropriate, since they provide negative price elasticity estimates for the residential, industrial and total electricity samples. Flow-adjustment models yield positive price

Acknowledgements

We thank J. Fred Bateman, Charles DeLorme, Jr., Peter G. Klein, William Lastrapes, and David B. Robinson for helpful comments and suggestions.

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View full text

The demand for residential, industrial and total electricity, 1973–1998

Abstract

Introduction

Section snippets

Theoretical framework and very brief literature review

The model

Residential electricity flow-adjustment model

Appropriate model

Acknowledgements

J. Econom.

J. Econom.

Modeling the aggregate demand for electricity: simplicity versus virtuosity

The practice of econometrics, classic and contemporary

Short-run income elasticity of demand for residential electricity using consumer expenditure survey data

Energy J.

Transcendental logarithmic utility function

Am. Econ. Rev.

An econometric analysis of residential electric appliance holdings and consumption

Econometrica

A Study in Econometrics: the Demand for Electricity in the United States