Household electricity demand, worldwide: climbing the ‘ladder of needs’

• DOI: http://doi.org/10.1111/j.1753-0237.2012.00212.x
• Date: 01 September 2012
• Author: François Lescaroux
• Published date: 01 September 2012

Household electricity demand, worldwide:

climbing the ‘ladder of needs’opec_212247..271

François Lescaroux*

Analyst, Qatar Petroleum, Strategic Planning and Policy Directorate, PO Box 3212, Doha, Qatar.

Email: francois.lescaroux@gmail.com

Abstract

Thispaper presents a new approach for modelling residential electricity consumption. Accounting for

the derived nature of electricity demand,it is expressed as an S-shaped function of per capita income

that reflects the diffusion in society of an unobserved stock of electricity-consuming goods—which

enableusers to meet a hierarchy of needs—as wealth increases.The specification is justified on simple

and quite general assumptions regarding income distribution and consumers’ spending behaviours.

Empirically,the model is applied to a panel of 91 countries over various time periods and a business-

as-usual projection up to 2030 is performed. Further, the approach might be of interest for analysing

households’ budget shares, and it could be expanded by crossing macro and micro data to estimate

dynamic Engel curves if applied to micro data on consumers’ expenditures byincome g roup.

1. Introduction

Household demand for electricity has been for long a fashionable subject for various

streams of economic research. Since the 1960s when electricity-consuming appliances

and equipments have started to spread widely in Western societies, energy economists

have been interested in understanding the drivers of residential electricity demand and

how it responds to changes in price, income and other sociological factors (see the early

review by Taylor, 1975). Over the years, their motives have changed: energy price

increases in the 1970s shifted attention towards energy conservation (Bohi, 1981; Bohi

and Zimmerman, 1984), while the deregulation of electricity markets raised other

concerns; nowadays, climate change issues have stirred up the interest for consumption

*This paper reports the results of research and analysis undertaken while the author was an

economist at the Institut Français du Pétrole (IFP), Economic Studies Division, 1 et 4, avenuede

Bois-Préau, F-92852 Rueil Malmaison, France, and then at GDF SUEZ, Strategy Division 1, Place

Samuel de Champlain—Faubourgde l’Arche, 92930 Paris La Défense Cedex, France. He is now

analyst at Qatar Petroleum, StrategicPlanning and Policy Directorate, Doha, Qatar. The views

expressed are the ones of the author; they do not necessarily reflect the position of IFP, GDF SUEZ

or Qatar petroleum. The author wishes to thank Oxford Economics for kindlyletting him

reproduce information from their forecasts’ databank.

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forecasts and identification of measures that would limit its growth. Parallel to this

research stream, economists workingon household expenditures were studying residential

electricity demand from a budget share perspective (see e.g. Deaton, 1975; Deaton and

Muellbauer, 1980; or Akmal and Stern, 2001, for a more recent analysis).

These studies have benefited from the large amount of information available from

surveys regarding household characteristics. Many approaches have been used (Dahl,

1993), from bottom-up modelling to top-down econometric models at various levels of

aggregation and relying on more or less sophisticated equations. The simplest ones make

use of a single, static, reduced form equation relating consumption to price and income.

This basic specification can be improvedby considering a lag structure for the endogenous

variable or the exogenous ones, hence making it ‘dynamic’, by adding measures of the

stock of electricity-using appliances and/or by taking into account the impact of block

pricing. As pointed out by Dahl (1993), ‘different models may be appropriate given the

resources at hand, the availabledata, and the purpose of the model.’

Theaim of this paper is to put forward a model of residential electricity demand intended

for forecasting global demand country-per-country.As a consequence, available informa-

tion is much scarcer than when dealing with developed countries only. Yet, the limitations

of simple log-linearspecifications are well known. The non-log-linearityof energy demand

as a function of income has been highlighted by Galli (1998) at the aggregate level and

Medlockand Soligo (2001) and Lescaroux (2011) at the sectoral level, who exit the constant

elasticity (log-linear) framework and estimate models of energy demand that allow the

income elasticity to decrease as income rises. Our analysis is an extension of these works

with a focus on household electricity demand rather than a general interest in aggregate or

sectoral demand dynamics.We propose an approach that deals with a non-observable stock

of appliances and equipments whose aggregate diffusion process is the sum of a series of

S-shaped functions each reflecting the diffusion of a peculiar electricity-consuming good.

The rest of the paper is organised in four parts. The next section comes back on the

relationship between household electricity demand,appliances ownership and wealth, and

it introduces our modelling approach. Then, the model is estimated in the third section and

the estimates are discussed, notably in regard to results published on Engel’s laws and to

what our approach could bring to this literature. The fourth section uses the model to

perform a business-as-usual projection. Finally, the fifth section summarises our results

and considers some implications of the research.

2. The ladder of needs, appliances ownership and household

electricity demand

First, it might be worth explaining the rationale for focusing on household electri-

city demand instead of considering total household energy demand. Residential energy

François Lescaroux248

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