Sectoral Electricity Demand and Direct Rebound Effects in New Zealand.

AuthorNepal, Rabindra

    Global electricity demand is growing faster than the increase in overall energy demand. In 2017, global electricity demand increased by 3.1% while energy demand grew by 2.1% (IEA, 2017a). The trend is set to continue and the share of electricity in total final energy consumption is expected to rise from 19% in 2015 to 24% in 2050 (EIA, 2016). The OECD economies have an average electricity consumption per capita of 7.9 MWh as compared to a per capita consumption of 2.1 MWh in 2017 in developing countries. The annual growth of electricity consumption in the OECD is expected to be about 1.2% (IEA, 2019).

    However, due to the presence of rebound effects, attempts to measure energy savings by undertaking energy efficiency improvements in order to curb rising electricity consumption is complicated. The concept of rebound effects in electricity consumption implies that technical progress can makes energy less costly relative to other goods. As a result, improving energy efficiency may save less electricity than initially expected due to a rebound in electricity consumption (Gillingham, et al., 2016). Determining the magnitude of rebound effects is appealing from a policy point of view since energy saving programs can become less effective as a result (Hunt and Ryan, 2015).

    New Zealand is the 10th highest per capita electricity consuming country in the world (IEA, 2015, WB, 2017). The country has aimed to increase energy efficiency in all sectors in order to curb rising electricity consumption as stated in the energy policy statement of New Zealand under the New Zealand Energy Strategy 2011-2021 (MED, 2011). Per capita electricity consumption declined from 9.2 MWh in 2010 to 8.6 MWh in 2015 (MBIE, 2018, WB, 2019). However, the consumption trends in different sectors of the economy vary (see Figure 1). While electricity consumption in the commercial sector has increased continuously, consumption in the industrial and residential sectors declined between 2010 and 2013 and increased again thereafter. Demand for electricity is likely to more than double from approximately 40 TWh in 2018 to almost 90 TWh by 2050. Meanwhile, the share of electricity of total delivered energy demand is projected to increase from 25% in 2016 to 61% by 2050 (Tanspower, 2018).

    Therefore, improvements in energy efficiency in the residential, industrial and commercial sectors are a priority under the New Zealand energy strategy to support economic growth, reduce greenhouse gas and improve energy security. The government also established a companion Energy Efficiency and Conservation Act in 2000 in order to back the energy strategy and launched the New Zealand Energy Efficiency and Conservation Strategy 2017-2022 in order to deliver an energy productive and low emissions economy. Nonetheless, the electricity demand projections in New Zealand do not consider rebound effects from energy efficiency improvements to electricity consumption. Ignoring the rebound effect may hamper the development of effective energy policies (Vivanco, et al, 2016), especially in generation and network investment planning as well as the operation of the power sector. Disregarding rebound effects leads to underestimation of demand projection, supply shortages, forced power outages, while overestimation of the demand may result in overinvestments, and ultimately in higher electricity prices (Steinbuks, 2017).

    This paper aims to analyze rebound effects as a potential cause of increase in electricity consumption by the residential, industrial, and commercial sectors in New Zealand between 1980 and 2015. We use structural time-series econometrics to separate the influences of rebound effects and income on sectoral electricity consumptions. The possibility of income affecting energy consumption in New Zealand has been dismissed in several studies. Isaacs, et al. (2010) found that under-heating in households is common, regardless of the income of the households. This paper is one of the few to analyze the consumption patterns and the rebound effect in the residential, industrial and commercial sector. The findings are also relevant for other countries aiming to implement efficiency policies to slow down the increase in electricity demand.

    Previous studies did not find causality between total electricity consumption and real gross domestic product (GDP) in New Zealand (Fatai, et al., 2004, Narayan and Prasad, 2008). Fatai, et al. (2003) found a long run cointegrated relationship between electricity demand, real GDP, electricity price and consumer price index (CPI) representing other energy prices. However, they did not find cointegration for consumptions in industrial, commercial and residential sectors. The findings of previous studies are inconclusive, partly owing to the omission of the rebound effect in estimations of electricity consumption.

    More than 15 years have passed since the original study by Fatai, et al. (2003) in estimating the New Zealand sectoral electricity demand was conducted. Within these years, economic development and technological transformation has influenced the sectoral electricity consumption patterns in New Zealand. Hence, we revisit and extend the previous studies and approaches in a number of ways. First, we update the data to capture the current consumption patterns in New Zealand. Second, instead of using data in total values, we use data in per capita unit following the majority of studies on estimating electricity demand (Dergiades and Tsoulfidis, 2008, Narayan and Smyth, 2005, Okajima and Okajima, 2013, Saunoris and Sheridan, 2013). Third, we use the actual natural gas price data instead of a price index as in Fatai, et al. (2003) as a proxy for price of a close energy substitute for the residential and the commercial sectors. Fourth, we estimate the magnitude of the rebound effect that may reduce the effectiveness of energy conservation policies. Fifth, a better understanding of the factors determining demand for electricity at sectoral level, as in the present study in the case of New Zealand, is needed given the gap in the literature. These factors include supply bottlenecks such as being an isolated electricity system, adverse effects of electricity shortage arising from heavy reliance on hydroelectricity and costly investments in new capacity with long gestation periods (Bhatia, 1987).

    The remainder of the paper is structured as follows. Section 2 provides a brief overview of the energy conservation policy in New Zealand and discusses the relevant literature. Section 3 explains the estimations methodology including the empirical framework of our analysis based on asymmetric demand responses to electricity price change and the data. Section 4 presents the estimation results. Section 5 concludes the study with relevant policy implications.


    The rebound effect is well conceptualized in the energy economics literature as a phenomenon where energy conservation measures potentially reduce energy costs and, consequently, encourage people to consume more energy (Gillingham, et al., 2013, Gillingham, et al., 2016, Greening, et al., 2000, Khazzoom, 1980, Orea, et al., 2015, Turner, 2013). The sub-sections below discusses the status of energy conservation policies in New Zealand and also reviews the relevant literature around rebound estimates respectively.

    2.1. Energy Conservation Policy in New Zealand

    Electricity is the main source of energy in the New Zealand residential sector. Electricity alone meets 69% of household energy demand while 34% of the total energy is used for space heating (Isaacs, et al., 2010). Traditionally, households in New Zealand have encountered under-heating problems since their average indoor temperature is below the standard temperature recommended by the World Health Organization (WHO), i.e., 21 degrees Celsius (Howden-Chapman, et al., 2009, Isaacs, et al., 2010, Lloyd, et al., 2008, O'Sullivan, et al., 2016). Factors explaining the poor heating conditions include the relatively old-age of the houses and inferior thermal insulation (Howden-Chapman, et al., 2009, Isaacs, et al., 2010, O'Sullivan, et al., 2015). For that, MED (2011) aimed to improve the house insulation that will not only increase the temperature but also gain significant energy and electricity savings (Grimes, et al., 2011).

    The Energy Efficiency and Conservation Strategy 2017-2022 recognizes the need for improving energy efficiency and productivity in the industrial and commercial use of electricity (MBIE, 2017). The strategy perceives that cost-effective energy efficiency improvements could reduce New Zealand's energy use and carbon emissions. Focusing on energy saving in the industrial and commercial sector will further leverage the renewable energy generation advantage for New Zealand as these sectors provide huge opportunities to reduce carbon emissions. Therefore, improvements in energy efficiency also imply improvements in carbon emission efficiency for New Zealand's economy as the electricity sector has 80% renewable generation (Khan, et al. 2018).

    In New Zealand, any energy efficiency improvements policy in order to promote energy savings needs to be implemented against the backdrop of a unique electricity system. No other country generates electricity from the same generation mix, low levels of energy storage and without a grid connection to another country (Transpower, 2018). A rapid electrification of the industrial and transport sectors in the push towards decarbonization is expected to pose energy security risks to New Zealand's electricity sector. For instance, electric vehicles (EVs) are expected to reach 40% market share by 2030 and 85% by 2050. Globally, the share of electricity in transportation is expected to double between 2015 and 2040 as more plug-in electric vehicles enter the fleet (IEA, 2017b).

    The Energy Efficiency and Conservation Strategy...

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