Substitution Between Energy Carriers In Aggregate Demand

in(ELEC/£) = o, + a2* In Y + In T + a4* In(RPELECZRPE) + (intime + «„* DUM84 + )n(ELEC/£)(-l )

where In denotes natural logarithm, (-1) denotes a lag of one year, a1, a2, a3, a4, a5, a6, a7 are parameters, ELEC/E is the share of electricity in total delivered energy, Y is a measure of economic activity, T is deviation from trend temperature, RPELEC is the price of electricity relative to that of all goods and services, RPE is the price of energy relative to that of all goods and

Table 9.12 Long-term price elasticities from the share/ratio equations

Electricity share

Coal share

Oil-coal ratio

Gas-coal ratio

Iron and steel

-1.0

-0.4

-0.1

-0.1

Mineral products

-0.1

-0.2

-2.3

-0.4

Chemicals

-1.4

-5.9

-2.5

-

Other industry

0.0

-0.8

-3.0

-

Rail transport

-2.3

-

-

-

Road transport

-

-

-

-

Water transport

-

-

-

-

Air transport

-

-

-

-

Domestic final use

-0.2

-0.3

-0.3

-

Other final use

-0.2

-0.5

-0.3

-

Note: -, not calculated.

Note: -, not calculated.

services, time is a time trend, DUM84 is a dummy variable for the miners' strike 1984=1 and e is an error term. The long-term price elasticities estimated from these equations are given in column 1 of Table 9.12.

The shares of coal in non-electricity energy demand by some users (chemicals, other industry, domestic final users and other final users) are treated on a similar basis, since consumer and government demand for coal is more closely related to locational, demographic and institutional factors than to relative prices or income levels (equation (9.5)). For these users, the ratio of oil to coal demand is estimated by another equation (equation (9.6)) and gas demand is taken as a residual. The share or ratio long-term price elasticities are shown in columns 2 and 3 of Table 9.12.

where the definitions are as for equation (9.4) and COAL/NEE is the share of coal in total non-electricity delivered energy, PCOAL, PGAS is the price of coal and gas respectively (pence per therm) and PNEE is the price of non-electrical energy (pence per therm).

Finally for two other users (iron and steel and mineral products), the ratio of gas to coal demand is also estimated, and coal then becomes the residual fuel:

where the definitions are as for equation (9.4) and OIL, COAL and GAS are delivered energy in these carriers (million therms), POIL, PCOAL, PGAS is the price of oil, coal and gas respectively (pence per therm) and PNEE is the price of non-electrical energy (pence per therm).

The price elasticities are much higher for substitution between some of the fuels than for substitution between energy and other goods and services. Since the estimating equations are in shares, the elasticities are not constant, but it is clear from the results for share elasticities in Table 9.12 that the own-price and some of the cross-price elasticities are as high as 3, implying a considerable ability for some industries to switch between fuels.

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