Top-Down Analysis of Energy Demand

Abstract

The practical use of bottom-up models for analyzing energy demand is faced with significant micro-data requirements. In order to keep such models manageable, the individual components of energy demand are usually linked to the same macroeconomic variables such as the Gross Domestic Product (GDP), per-capita income, and relative energy prices. This gives rise to the question, “Why not model energy demand directly as a function of these macro variables?”. This macro approach is presented in this chapter, exploring the role of population growth, economic growth, and in particular changes in relative prices. However, this approach raises issues of its own: How does one differentiate between short-term and long-term adjustments of demand? Do rising and declining prices have the same effect on energy demand? How can the effects of technological change be isolated from the effects of changes in energy prices? Is the relationship between energy and other production inputs, in particular capital, substitutive or complementary?