Economic Modelling of Energy Services: Rectifying Misspecified Energy Demand FunctionsNo 147, Surrey Energy Economics Centre (SEEC), School of Economics Discussion Papers (SEEDS) from Surrey Energy Economics Centre (SEEC), School of Economics, University of Surrey 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. Keywords: Modelling Energy Services Demand; Energy Efficiency; Energy Demand Function Misspecification. (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:sur:seedps:147 Access Statistics for this paper More papers in Surrey Energy Economics Centre (SEEC), School of Economics Discussion Papers (SEEDS) from Surrey Energy Economics Centre (SEEC), School of Economics, University of Surrey Contact information at EDIRC. |
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