Energy Economics and Policy
Spring 2012
Instructors: Chu Xiaodong , Zhang Wen
Email：[email protected],
[email protected]
Office Tel.: 81696127
Energy Demand
• Energy is crucial to the improvement of social and
economic welfare
• One contributing factor of the great economic
achievements over the last century is the
replacement of manpower with mechanical and/or
electrical power
Energy Demand
• Nowadays global energy demand is met primarily by
fossil fuels
• The composition of energy demand is not constant,
which is shaped by many factors such as availability,
price, technology, economic structure and
environmental considerations
Energy Demand
World total final consumption from 1971 to 2009 by fuel (Mtoe)
1973 and 2009 fuel shares of total final consumption
Energy Demand
World electricity generation from 1971 to 2009 by fuel (TWh)
1973 and 2009 fuel shares of electricity generation
Energy Accounting
• Energy balance tables are used to track the total
energy required for consumption by sector and fuel
type
– Raw energy commodities must usually be converted to
some other form prior to being consumed by end-users
• For example, raw crude oil is generally converted into products
such as gasoline
• Wet natural gas is typically processed into natural gas liquids
• The energy conversion industries convert primary
energy inputs to products for final consumption
Energy Accounting
Energy balance tables
Energy Accounting
• From energy balance tables
– Total primary energy requirement (TPER) is greater than
total final consumption (TFC)
– The difference between TPER and TFC stems from
conversion and distribution losses
Energy-Capital Relationship
• The demand for energy is a derived demand
– Energy is an input to provide a set of energy services such
as producing steam, driving certain industrial processes,
and providing transportation services
• The relationship between energy use and capital
stock can be expressed as
E
u

K
where E denotes energy use, K denotes the capital
stock, u denotes capacity utilization of capital, and ε
denotes the energy efficiency of capital
Example 2.1: Motor Fuel Consumption
• Consider the case of motor fuel consumption
– Capital stock K is expressed as the number of motor
vehicles
– Capital utilization u is expressed as miles per vehicle
– Efficiency ε is expressed as miles per gallon
gallons 
miles vehicle
 vehicles
miles gallon
Example 2.1: Motor Fuel Consumption
• The service derived from vehicle ownership and the
consumption of gallons of fuel is miles
• It is possible to rearrange the equation and obtain
the amount of fuel consumption required to achieve
a given level of transportation service
 miles   gallons
  
miles  
 gallon   vehicle

 vehicles

Example 2.1: Motor Fuel Consumption
• Energy use is positively related to capital utilization
that denotes the service rendered by capital
equipment, such as miles driven per vehicle
• However as efficiency increases, the energy required
per unit of service declines
• Efficiency gains can offset increased utilization and
growing vehicle stocks thereby mitigating increased
fuel consumption
*Writing Skill
• The paragraph of “According to the US Federal
Highway and Traffic Safety Administration…” (on
page 92 of [Evans & Hunt, 2009]) is a good example
of deducing results from facts
Energy Demand in Long Run
• Economic structure and technology influence energy
intensity
– Energy intensity is defined as the quantity of energy
consumed per unit of economic output
• Energy intensity ultimately declines as economies
develop
Trends in energy intensity in the US (1880–2005)
Energy Demand in Long Run
• The theory of dematerialization
– Energy intensity initially increases then decreases with
increasing GDP
– The later in time economic growth occurs, the lower the
maximum intensity of use of energy will be
Dematerialization and energy intensity
Energy Demand in Long Run
• Changing economic structure has a significant
influence on energy use
– The structural changes result in changes in the structure of
the capital stock, which will promote changes in energy
intensity
• At higher levels of economic development, energy intensity
declines as the service sector relative to other sectors
Energy Demand in Long Run
• Consider a three-sector economy
– Total energy consumption is the sum of energy use across
all sectors
E  E A  E I  ES
– Total output is
Y  YA  YI  YS
– Total energy intensity is
E E A  E I  ES

Y
Y
E Y
E Y
E Y
 A A I  I  S  S
YA Y
YI Y
YS Y

E
EA
E
 A  I  I  S  S
YA
YI
YS
Energy Demand in Long Run
• Consider a three-sector economy (cont’)
– Assume that the energy intensity of each sector can be
ordered such that
E A ES E I


YA YS YI
– If sector I grows faster than sector A, holding the output
share of sector S constant, how will the total energy
intensity change?
Energy Demand in Long Run
• Consider a three-sector economy (cont’)
– The derivative of the total energy intensity w.r.t the output
share of sector I
d ( E Y ) E A d A EI d I ES d S






d I
YA d I YI d I YS d I

E A d (1   S   I ) EI ES d S




YA
d I
YI YS d I
 E A EI   E A ES  d S
 
  
    

 YA YI   YA YS  d I
E
E
 A  I 0
YA YI
– The impact on energy intensity of the shift to sector I is
positive
Energy Demand in Long Run
• Technological progress effectively lowers the peak
energy intensity of an economy
• The influence of technology change can be expressed
by
u    K I   uS  S   K S 
E u A  A   K A

 A  I I
I
S
Y
YA
YI
YS
– An increase in energy efficiency in any sector (by adopting
a new technology) will lead to a decline in the energy
intensity of sector and overall energy intensity
– The impact of the technological change will be the greatest
if it occurs in the sector with the largest share of total
output
Energy Demand in Long Run
• How is the second derivative of the total energy
intensity to energy efficiency in any sector?


ui  i  K i
d 2 E Y 

2

 i  0
d i2
Yi
2
– The negative effect on energy intensity is increasing with
the innovation
– Any innovation in a sector that occurs in one country can
have a substantial impact on energy intensity in countries
that develop later in time, provided the technology is
transferable
Modeling Energy Demand
• The decision of energy consumption usually involves
three choices as
– The choice to invest in capital stocks
– The choice of a particular type of capital stocks
– The choice of a rate of capital utilization
• These choices all lead to a desired amount of energy
service
Modeling Energy Demand
• Dynamic models that incorporate dynamic
investment behavior are suited to capture both the
short- and long run responses of energy demand to
changes in economic variables
• Static models that do not incorporate dynamic
behavior are also widely utilized, and they can be
valuable in understanding full-adjustment variable
response
Modeling Energy Demand
• Model taxonomy
–
–
–
–
The static model of a firm
The dynamic model of a firm
The static model of a household
The dynamic model of a household
• Please reference a proper model when you will work
on a modeling problem
– Models on Pages 97-101 are two good examples
Elasticity of Energy Demand
• Elasticity is a measure of how much buyers and
sellers respond to changes in market conditions
• The responsiveness (or sensitivity) of consumers to a
price change is measured by a product’s price (or
income) elasticity of demand
Ed 
% of change in quantity demanded
% of change in price (or income)
– If a specific percentage change in price produces a larger
percentage change in quantity demanded, demand is
elastic, otherwise it is inelastic
Elasticity of Energy Demand
• Cross elasticity is the responsiveness of demand of
one good to changes in the price of a related good
either a substitute or a complement
% of change in quantity demanded of good X
Exy 
% of change in price of good Y
Elasticity of Energy Demand
Price
The demand curve can be a
range of shapes each of
which is associated with a
different relationship
between price and the
quantity demanded
Quantity Demanded
Elasticity of Energy Demand
Total
revenue isofprice
x
The importance
elasticity
is
the information
it
quantity
sold. In this
provides on the effect on
example,
TR = 5 x 100,000
total revenue of changes in
= 500,000
price.
Price
This value is represented
by the grey shaded
rectangle
5
Total Revenue
100
Quantity Demanded
Elasticity of Energy Demand
If the firm decides to
decrease price to (say) 3,
the degree of price
elasticity of the demand
curve would determine
the extent of the increase
in demand and the
change therefore in total
revenue
Price
5
3
Total Revenue
D
100
140
Quantity Demanded
Elasticity of Energy Demand
Price
Producer decides to lower price to attract sales
10
% Δ Price = -50%
% Δ Quantity Demanded = +20%
Ed = -0.4 (Inelastic)
Total Revenue would fall
5
Not a good move!
D
5 6
Quantity Demanded
Elasticity of Energy Demand
Producer decides to reduce price to increase sales
Price
% Δ in Price = - 30%
% Δ in Demand = + 300%
Ed =-10 (Elastic)
Total Revenue rises
10
Good Move!
7
D
5
20
Quantity Demanded
Elasticity of Energy Demand
• The price elasticity is often used as an indicator of
the impact of various policies aimed at conservation,
such as energy taxes or subsidies
– For example, if policy targets a demand reduction through
the implementation of a tax in a sector where price
elasticity is very low, then the policy is unlikely to achieve
its stated goal, which results in large costs being imposed
on consumers without an off setting benefit
Next Lecture
• The main topic will be Economics of Energy Supply
• Pages from textbooks are good learning reference
including Chapter 3 of [Evans & Hunt, 2009] and
Pages 53-56 of [McConnell, Brue & Flynn, 2012]