Energy-economy Relationship

National Training Course on Energy Demand Analysis and Projections, (C7-KAM/2/01), Phnom Penh, Cambodia, 16-27 July 2012

Why do we need energy?

Essentially for two purposes Basic Needs/Comforts

Economic activities to have higher

productivity of Land, Labour and Capital

(Machinery and equipment)

Energy use for Basic Needs/Comfort

Energy for End-Uses Cooking Lighting Cooling

Hot water/space heating

Appliances

The Driving factors for End-use Energy

At Micro level (one house or family) Energy use = f (Income level, Size of the family, Type of house, Access to energy, Energy availability, Energy prices, Environment, Number of appliances, Efficiency of the appliances)

At Macro-level i.e. Economy-wide Relation

Energy use per capita =

f ( GDP per capita)

GDP is Gross Domestic Product

Energy Use in Economic Activities

Lighting Space heating/cooling Motive power Steam generation e.g. in boilers in industries

Heat generation e.g. chemical processing in industries

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Energy-Economy Relationship

Are these relations always positive? Linear? What bout the Inter-relationship between driving factors?

Energy use per capita

GDP per capita

Climbing the Energy Ladder

Average energy demand by income segment in Brazil

Use of cars
13,000
vehicle-km/capita

11,000

9,000

Australia US Canada

7,000

w. Germany Denmark
5,000

UK Sweden

3,000

Netherlands Japan

1,000 9,000

11,000

13,000

15,000

17,000

19,000

21,000

23,000

25,000

27,000

GDP (1990 US$)/capita

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GDP per Capita versus Electricity Use per Capita

30,000 25,000
US$/capita/year

20,000 15,000 10,000 5,000 0 0 5,000 10,000 15,000 20,000 25,000 kWh/capita/year
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GDP/Capita versus Electricity Consumption/Capita

3,000 2,500
US$/capita

Algeria

2,000
1,500 1,000

500 0
0

Indonesia Ivory Coast Kenya Philippines Burma India Nigeria Ghana Pakistan Bangladesh
200 400 600

Peru Egypt

China
800

kWh/capita/year
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GDP-Electricity Relation; Points to consider

No smooth linear relation but

Higher electricity use at

higher level of GDP increasing at an increasing rate increase in GDP but electricity use still increasing GDP and electricity use

From Basic needs to Comforts Extension in Electricity Net Work Seasonal variation Lower economic activities
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In some years

In some years no

Downward shift in both

Concepts of Energy Intensity and Elasticity

Energy Intensities

Are given for an equipment e.g., Litre of fuel per kilo meter for a car or kW per hour for a machine Are computed by dividing total energy use by the economic activity e.g., Tonne of coal used and divide it by Value added in a Brick-making industry measured in US $
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An example of change in energy intensity

China cut energy use per unit of GDP by about

three-quarter since 1980 or in half since 1990

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Energy Intensity of Chinas GDP Tons of coal equivalent per US $ 1000 in 1980s Prices

Source: Zhang (2000)

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Energy Intensity in Manufacturing sector of the USA in 2002 (Thousand BTU per US $)
Total Miscellaneous Furniture and Related Products Transportation Equipment Electrical Equip., Appliances, and Components Computer and Electronic Products Machinery Fabricated Metal Products Primary Metals Nonmetallic Mineral Products Plastics and Rubber Products Chemicals Printing and Related Support Paper Wood Products Leather and Allied Products Apparel Textile Product Mills Textile Mills Beverage and Tobacco Products Food 0 5 10 15 20 25 30 35 40

Source: EIA at www.eia.doe.gov

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Grouping of Activities by Production Sectors based on Energy Intensity Criterion Macro-level

All manufacturing related activities into Three Major Groups

Basic Material

Consumer Goods
Machinery-equipment Or Grouping of similar types of activities in a production sector e.g. energy use in all farmrelated activities under Agriculture sector
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Some Basic Grouping of Economic Activities

Agriculture
Mining Construction Manufacturing Transportation Service To make sub-set of activities that have similar energy uses.
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Theory of S-curve relation in Energy Use and Economic Development

PR : Pre-industrial IN : Industrialisation ID : Industrialised Per-capita demand for commercial energy -

PI : Post-industrial
underlying trend

PR

IN

ID

PI

Level of economic developement Energy consumption and economic development S-curve Source : Grubb M. (1991)

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Concept of Income Elasticity of Energy Use

Elasticity =

Percentage Change in Energy use

Percentage Change in GDP Energy

Elasticity < 1 energy use growing at a lower rate

= 1 implies both growing at the same rate

> 1 energy use growing at a higher rate

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GDP Elasticities (1980-2000)

12 2.0 1.8 10 1.6 1.4
Annual growth rate (%)

8 1.2 GDP 6 1.0 Energy use Income elasticity 0.8 4 0.6 0.4 2 0.2 0 Low-income economies* China India Uppder-middle-income economies High-income economies 0.0

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Energy Demand Forecasting: Alternative Methods and Techniques

Main Techniques

The technique/approaches most widely used for projection of energy demand are: Trend Analysis Elasticities Approach Econometric Methods Process Analysis
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Trend Analysis (1/2)

The methodology involves simple extrapolation of Past trends of growth of total energy consumption, energy consumption in individual sectors or per capita energy consumption, as a function of time or that of some other suitable parameter e.g. the economic activity level. The extrapolation can be affected by fitting an appropriate curve to the available past data and extending it to cover the projected values of the reference parameter.
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Trend Analysis (2/2)

A frequently used practice is to work out the base year energy intensity i.e. the energy/economic activity ratio (for the whole economy or for each sector individually) using recent data

and
to calculate future energy requirements corresponding to the projected future levels of economic activity on the basis of the above energy intensity (preferably after suitably adjusting it).

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Trend Analysis

Advantages:
Simplicity Minimal requirements of data

Disadvantages:
Does not explain the determinants of energy demand Does not capture effect of structural changes in the economy Future, even in the long term, linked very tightly with the past Approach not suitable for policy analysis work
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Elasticities Approach

Income elasticity of demand (IED) and price elasticity of demand (PED) are measures of the responsiveness of energy demand to variations of income and price respectively.
The income elasticity of demand is defined as the percentage change in energy consumption resulting from one percent increase in consumers income, all other influences on demand remaining constant. Thus

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Elasticities Approach
Advantages: Simplicity

Small data requirement

Suitability, to a certain extent, for policy analysis work

Disadvantages:

Energy demand is considered as a function of only two variables (income and price) and does not take into account other detminants of demand. Constant elasticity values imply the same behaviour of economy to income and price changes in future as was experienced in the past Does not capture effect of structural changes in the economy nor that of technological improvements
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Econometric Methods
The approach involves regression analysis of the historical data covering a set of relevant parameters. In this approach the demand for energy (or for a particular fuel) is related to a set of parameters through an appropriate functional form. For example, one can use the functional relations such as Et = k + aAt + bBt +cCt + .

or
Et = k + aAt + bAt +cAt + or Et = k + aEt-1 + bAt

and so on
Here Et is the energy demand and At, Bt, Ct, . are the values of the explanatory parameters A, B, C .. at time t and k, a, b, c.. are constants whose values are obtained by fitting the chosen functional relationship to the historical data using the ordinary least squares method.

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Econometric Methods
Advantages:

Useful for policy analysis in the short-run and long-run projections

Can cover whole economy, or individual sectors and fuels Explicit assumptions regarding economic parameters (income, price) and other policies such as mechanization urbanization, structure of industries etc., can be incorporated into projections Can assist in analysis of energy-economy interactions with the help of simultaneous equation model Should be used by experienced econometricians Necessary data of sufficient quality over long time periods are not available Applicable under fairly stable economic conditions Projections are conditioned by past behaviour Cannot capture technological details Effect of new technological developments cannot be incorporated 32

Disadvantages:

Process Analysis
Two different approaches to Process Analysis technique are: i. RES approach based on the Reference Energy System initially developed at the Brookhaven National Laboratory for United States Department of Energy and later applied to various other countries,

ii.

The MEDEE approach, which was initially developed at the University of Grenoble in France and later adopted to version MEDEE-2 at International Institute of Applied Systems Analysis (IIASA) in Austria.

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RES Approach
Advantages: Readily adaptable to supply system modeling Allows clear identification of inter-fuel substitution possibilities

Covers both commercial and non commercial fuels

Allows for capturing future technological development possibilities in details The various assumptions underlying the projections are very clearly spelled out Simple computation requirements Highly data intensive approach Needs multi-disciplinary expertise to develop a consistent scenario of a large number of socio-economic, technological and policy related parameters Does not explicitly capture relative price influences on conservation and inter-fuel substitution Does not allow for energy-economy feedback 34

Disadvantages:

Thanks