Modelling energy demand under discontinuities from an energy economic point-of-view

Abstract

The major motivation for this paper is the need for the identification of policies required in principle for heading toward sustainable energy systems in any region world-wide. In particular, this work emphasizes modelling the demand side of energy systems and identifies interactions with energy policy measures. The core objective of this paper is to carry out a review of econometric energy demand modelling approaches over time. In this context, special attention is paid to lessons learned from modelling historical discontinuities and structural breaks in order to better understand issues of disruption. Our analysis builds on econometric analyses using standard estimation approach for modelling energy demand by means of a production function, depending on price and income. We start with ordinary least-squares (OLS) and extend the approach to autoregressive distributed lag (ARDL)model. We identify long-term as well as short-term elasticities. Finally, we analyze whether elasticities are constant over time and whether structural breaks exist. The major conclusions of our analyses are that approaches assuming constant elasticities over time are no longer useful. The magnitude of the impact made by economic parameters such as prices and income elasticities over time has been decreasing due to our analyses. This has an impact on energy policies, namely taxes and standard. The effect of taxes in an energy system is that they increase prices and reduce energy demand depending on the price elasticities. Yet, the smaller price elasticities are, the lower the impact of new taxes is. This leads to the conclusion that there is still a higher need for increased standards and technological innovations. The major useful policy suggestion based on this research is that technical measures for increasing energy efficiency are very important as a measure accompanying energy taxes.