Residential energy demand: An integrated two-levels approach

Abstract

Previous studies of residential energy demand in Canada have relied on the top-down or two-levels approach. At the first level, total energy demand measured in thermal units is made a function of its relative price, real income, and other explanatory variables; at the second level, energy market shares depend on energy sources relative prices. The aggregate energy price is the link between the two levels. The measurement of energy consumption in terms of energy equivalence introduces systematic biases in aggregate energy price and income elasticities. In this paper, we adopt the two-levels approach but abandon measurement of energy use in terms of energy equivalence. The presence of an explanatory variable other than energy sources prices in the energy unit cost function brings the integration of the two levels at the estimation stage. Wood is included as a separate fuel along with electricity, oil and natural gas. The model is applied to Quebec residential sector. The main results are as follows: first, Quebec aggregate residential energy demand is found to be price and income inelastic; second, electricity and oil own-price elasticities are less than one, however they are above one for natural gas and wood; third, gross substitution prevails among the four energy sources, and fourth, the expansion of the national gas distribution network contributed to a lower aggregate energy price.