CE5214A/QA

Energy demand analysis for the built environment

Lecture 3: Energy Demand Analysis (Micro-Macro level)

AY 2022-23 (Semester II)

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 Consumer Demand for Energy

Our plan
• Continuous preference
• Discrete preference
• Discrete-continuous preference

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 Multinomial Logit Model Can WTP vary across decision-makers?

𝑃𝑖𝑗 = 𝑃𝑟(𝑈𝑖𝑗 + 𝜀𝑖𝑗 ≥ 𝑈𝑖𝑙 + 𝜀𝑖𝑙 , ∀𝑙 ≠ 𝑗)

𝑈𝑖𝑗 : systematic utility of alternative 𝑗 for the decision-maker 𝑖

𝜋2
If 𝜀𝑖𝑗 ~Gumbel 0,1 ; location parameter: 0; scale parameter 1; mean: 0; variance: 6
𝑒 𝑈𝑖𝑗
𝑃𝑖𝑗 𝜽 =
σ𝑙∈𝐶𝑖 𝑒 𝑈𝑖𝑙
Where 𝜽 is a vector of utility parameters.
Willingness to Pay (WTP) : How much of money are consumers willing to pay to improve one unit of an attribute.
𝑉𝑖𝑗 = 𝑿′𝑖𝑗 𝜷𝑗 + 𝛼 𝐼𝑖 − 𝑝𝑖𝑗 + 𝜀𝑖𝑗
𝑋𝑖𝑗1 𝛽𝑗1 𝜕𝑉𝑖𝑗
𝑿𝑖𝑗 = ⋮ ; 𝜷𝑗 = ⋮ ; 𝑀𝑈𝑋𝑖𝑗𝑘 = = 𝛽𝑗𝑘
𝑋𝑖𝑗𝐾 𝜕𝑋𝑖𝑗𝑘
𝛽𝑗𝐾
𝐾×1 𝐾×1

𝑊𝑇𝑃𝑗𝑘 = 𝑀𝑈𝑋𝑖𝑗𝑘 Τ𝑀𝑈𝐼𝑖 = − 𝑀𝑈𝑋𝑖𝑗𝑘 ൗ𝑀𝑈𝑝𝑖𝑗

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𝛽𝑗𝑘 3
𝑊𝑇𝑃𝑗𝑘 = ൗ𝛼 (For linear utility specification)
 Consumer Surplus
Consumer Surplus (continuous demand): difference between the willingness-to-
pay and actual price

If an alternative is improved, the utility it provides is larger, and the consumer is

more satisfied when choosing it.

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 Consumer Surplus (CS) for Discrete Choices
Marginal utility of income 𝑀𝑈𝐼𝑖 can be used to evaluate utility in monetary terms
max 𝑉𝑖𝑗
𝑗∈𝐶𝑖
𝐶𝑆𝑖 = where 𝑀𝑈𝐼𝑖 = - 𝑀𝑈𝑃𝑖𝑗
𝑀𝑈𝐼𝑖

𝑉𝑖𝑗 = 𝑈𝑖𝑗 + 𝜀𝑖𝑗 ; 𝜀𝑖𝑗 ~Gumbel 0,1

max 𝑉𝑖𝑗 = max 𝑈𝑖𝑗 + 𝜀𝑖𝑗 ~Gumbel ln ෍ 𝑒 𝑈𝑖𝑗 , 1

𝑗∈𝐶𝑖 𝑗∈𝐶𝑖
𝑗∈𝐶𝑖

𝔼 max 𝑉𝑖𝑗 = ln ෍ 𝑒 𝑈𝑖𝑗

𝑗∈𝐶𝑖
𝑗∈𝐶𝑖
Change in expected value of consumer surplus is:
1 0
𝑈𝑖𝑗 𝑈𝑖𝑗
ln σ𝑗∈𝐶 1 𝑒 − ln σ𝑗∈𝐶 0 𝑒
𝑖 𝑖
∆𝔼 𝐶𝑆𝑖 =
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𝑀𝑈𝐼𝑖 5
 Empirical Study
Investing in energy-efficient goods: more expensive now, savings in the future
How do consumers value money in the future?

Discount rate (r): reflects the relative value an individual places on future
consumption compared to current consumption

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 Empirical Study
Consider a homeowner evaluating purchase of a new heating system. The present
worth (PW) of the lifecycle cost of the system is:
Operating cost (𝑜𝑐𝑡 )
PW = Installation cost (ic) + σ𝑇𝑡=1
1+discount rate (𝑟) 𝑡

Operating cost (𝑜𝑐𝑡 ) 𝑜𝑐𝑡

For large 𝑇, σ𝑇𝑡=1 =
1+discount rate (𝑟) 𝑡 𝑟

The preferred system depends on the discount rate

A high discount rate makes the present value of future operating cost savings smaller
In that case consumer would choose a less expensive but relatively inefficient unit
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 Data
Choice of heating system in California Data description
idcase: decision-maker’s unique id
Five types of systems are considered : alt: alternative name
(1) gas central (gc)
depvar: choice outcome 𝑦𝑖𝑗
(2) gas room (gr)
ic: installation cost of each alternative ($)
(3) electric central (ec)
oc: annual operating cost of each
(4) electric room (er)
alternative ($)
(5) heat pump (hp)
agehed: age of the household head
Model 1: 𝑉𝑖𝑗 = 𝛽1 𝑖𝑐𝑖𝑗 + 𝛽2 𝑜𝑐𝑖𝑗 + 𝜀𝑖𝑗
Model 2: 𝑉𝑖𝑗 = 𝐴𝑆𝐶𝑖𝑗 + 𝛽1 𝑖𝑐𝑖𝑗 + 𝛽2 𝑜𝑐𝑖𝑗 + 𝜀𝑖𝑗
Model 3: 𝑉𝑖𝑗 = 𝐴𝑆𝐶𝑖𝑗 + 𝛽1 𝑖𝑐𝑖𝑗 + 𝛽2 𝑜𝑐𝑖𝑗 + 𝜀𝑖𝑗 (same as model 2 , but different reference level)
Model 4: 𝑉𝑖𝑗 = 𝐴𝑆𝐶𝑖𝑗 + 𝛽1 𝑖𝑐𝑖𝑗 + 𝛽2 𝑜𝑐𝑖𝑗 + 𝛾𝑖𝑗 𝑎𝑔𝑒ℎ𝑒𝑑𝑖 + 𝜀𝑖𝑗
Model 5:𝑉𝑖𝑗 = 𝐴𝑆𝐶𝑖𝑗 + 𝛽1 𝑖𝑐𝑖𝑗 + 𝛽2𝑗 𝑜𝑐𝑖𝑗 + 𝛾𝑖𝑗 𝑎𝑔𝑒ℎ𝑒𝑑𝑖 + 𝜀𝑖𝑗
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 Model 1’s Result

a) Do the estimated coefficients have the expected signs?

b) Are both coefficients significantly different from zero?
c) How much is consumer willing to pay to reduce $1 in operating cost?
d) 𝑉𝑖𝑗 = 𝛽1 𝑖𝑐𝑖𝑗 + 𝛽2 𝑜𝑐𝑖𝑗 + 𝜀𝑖𝑗 (i.e., 𝛽1Τ𝑟 = 𝛽2 ). What is the annual interest rate?

a) Yes
b) Yes
c) The decision-maker is willing to pay $0.73 ([-0.00458]/[-0.00623]) more installation cost in
order to reduce annual operating costs by $1. Does this seem reasonable?
d) Annual interest rate (𝑟): ([-0.00623]/[-0.00458]) = 1.36 = 136% (unreasonably high)

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 Model 2’s Result

Annual interest rate (𝑟): ([-0.00153]/[-0.00699]) = 0.218 = 21.8%

Informal null hypotheses: Effective fit of both models are the same. (works for nested models)
Pr(>Chisq) < .05 ⇒reject null hypothesis ⇒ Model 2 provides better model fit than model 1
(accounting for additional parameters).
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 Microeconomic Foundation for Discrete-Continuous
Preferences

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 Preference-Usage Models
• Fuel conservation policies
• Fuel economy standards: Regulate how far vehicles must travel on a gallon of fuel (supply side).
• Feebate policy: Change upfront cost based on fuel efficiency of a vehicle (demand side).

• Effectiveness of such policies depends upon the sensitivity of car buyers’ preferences to buy fuel-efficient cars
and car usage

• Dubin and McFadden (1984): the first instance of energy product choice and usage model. Ignores
the cross-equation restrictions and estimate them separately.
• Bento et al. (2009): one-step structural approach to simultaneously estimate both dimensions within
a utility-theoretic framework
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 Joint Car Choice-Usage Model (Bento et al., 2009)
max 𝑈 𝑿𝑖𝑗 , 𝑀𝑖 , 𝐸𝑖
𝐸𝑖 ,𝑗∈𝐶𝑖 ,𝑀𝑖
𝑝𝑖𝑗 +𝑀𝑖 𝑟𝑖𝑗 + 𝐸𝑖 ≤ 𝐼𝑖

𝐼𝑖 : Annual income of the decision-maker 𝑖

𝐸𝑖 : Total annual expense on composite good by the decision-maker 𝑖
𝐶𝑖 : Set of available discrete alternatives for the decision-maker 𝑖.
𝑿𝑖𝑗 : Vector of characteristics of alternative j for the decision-maker 𝑖.
𝑝𝑖𝑗 : Price of alternative j for the decision-maker 𝑖 (converted in annual rental based on life-span & interest rate).
𝑀𝑖 : Annual vehicle kilometers travelled by decision-maker 𝑖.
𝑟𝑖𝑗 : Operational cost per kilometer of alternative j for the decision-maker 𝑖.

This problem can be solved in two stages:

• The continuous portion of the problem conditional on the chosen good
• Discrete choice problem

we obtain the indirect utility of alternative 𝑗 conditional on the discrete choice:

𝑉𝑖𝑗 = 𝑉 𝑿𝑖𝑗 , 𝑟𝑖𝑗 , 𝐼𝑖 − 𝑝𝑖𝑗
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 Joint Choice-Usage Model (Bento et al., 2009)
• Vehicle choice
• Indirect utility of household 𝑖 conditional on choosing car 𝑗: • 𝐼𝑖 is the annual income of household 𝑖

𝑣𝑖𝑗 = 𝑢𝑖𝑗 + 𝜀𝑖𝑗 • 𝑝𝑗 is the annualized purchase price or rental cost of car 𝑗
1 1 • 𝑿𝑖𝑗 includes car-specific, household-specific, and
= − 𝑒 −𝛽𝑖 𝐼𝑖 −𝑝𝑗 −𝜸𝑿𝑖𝑗 −𝜂𝑖 − 𝑒 𝛼𝑖 𝑟𝑗 + 𝜀𝑖𝑗 , interactions
𝛽𝑖 𝛼𝑖
• Probability of choosing car 𝑗 by household • 𝑟𝑗 is the operation cost of car 𝑗 for one kilometre
𝑢 Τ𝜇 • 𝜂𝑖 is an unobserved normally-distributed taste for driving
𝑒 𝑖𝑗
𝑃𝑖𝑗 = ‫׬‬ 𝑓 𝒖|𝚯 𝑑𝒖. with mean zero and standard deviation 𝜎
σ𝐽𝑘=1 𝑒 𝑢𝑖𝑘Τ𝜇
• 𝜀𝑖𝑗 is an iid error term that follows Gumbel distribution
with location parameter zero and scale 𝜇,
• Annual driving distance • 𝛽𝑖 ∶ lognormal distributions with parameter 𝝎𝜷
• Using Roy’s identity: • 𝛼𝑖 ∶ negative lognormal distribution with parameter 𝝎𝜶
𝜕𝑣𝑖𝑗 Τ𝜕𝑝𝑗 • 𝚯 = 𝜸, 𝝎𝜶 , 𝝎𝜷 , 𝜎 : parameters of systematic utility
𝐾𝑀𝑖𝑗 = − = 𝑒 𝛽𝑖 𝐼𝑖 −𝑝𝑗 + 𝜸𝑿𝑖𝑗 +𝛼𝑖 𝑟𝑗 +𝜂𝑖
,
𝜕𝑣𝑖𝑗 Τ𝜕𝐼𝑖
𝜶𝒊 𝑟𝒋 is short-run mean fuel price elasticity of annual VKT
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Bansal P. and Dua R. (2022). Fuel consumption elasticities, rebound effect and feebate effectiveness in the Indian and Chinese new car markets. Energy Economics. DOI: https://doi.org/10.1016/j.eneco.2022.106192
 Overview of the Study
• Data: national-level data on Chinese and Indian car buyers’ socio-demographics, revealed preferences for
car types, and car usage (2016-17)

• Main outcome
• Fuel price and income elasticity of fuel consumption
• Effect of a purchase price reduction and fuel economy improvements on the fuel consumption
• Effect of a revenue-neutral feebate policy on fleet fuel economy and fuel consumption

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 Dataset
• Initial quality survey (IQS) data collected in India and China by J.D. Power (2016-17).

• New car buyers with ownership of two to six months.

• Available data:
• Attributes of purchased vehicle – make, model, segment, fuel economy, & purchase price
• Months of ownership, mileage on the vehicle, and demographics
• Aggregated sales data

• India and China have 81 and 234 models, respectively.

• India and China samples have 7894 and 8951 households , respectively.

• Choice-based sampling weight ranges of India and China are [0.21, 8.18] and [0.14, 5.88].

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 Model Specification
• Used inflation-adjusted interest rate, expected car life, 2016-17 fuel price from literature.

• Fuel price remains the same for all models, the variation in operating cost arises from heterogeneity in fuel
economy.

• Make- and segment-specific fixed effects to account for unobserved vehicle characteristics.

• With 234 alternatives and over 100 parameters, the estimation time is around 50 hours for China.

• All households have the same choice set.

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 Model fit (China)
Market Share Vehicle kilometres travelled

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 1 −𝛽 𝐼 −𝑝 −𝜸𝑿 −𝜂 1 𝛼𝑝
𝑣𝑖𝑗 = 𝑢𝑖𝑗 + 𝜀𝑖𝑗 = − 𝑒 𝑖 𝑖 𝑗 𝑖𝑗 𝑖 − 𝑒 𝑖 𝑗 + 𝜀𝑖𝑗
𝛽𝑖 𝛼𝑖
ln 𝐾𝑀𝑖𝑗 = 𝛽𝑖 𝐼𝑖 − 𝑝𝑗 + 𝜸𝑿𝑖𝑗 + 𝛼𝑖 𝑟𝑗 + 𝜂𝑖
Estimation Results India China
Standard Standard
Estimates Estimates
error error
• Male with higher car ownership and larger Fixed parameters (γ)
families drive more in both countries. Age (year/100) -0.33*** 0.10
Female? -0.13*** 0.040 -0.063*** 0.013
Number of cars 0.091*** 0.022 0.035** 0.016
Family size 0.035*** 0.0070 0.14** 0.080
• Car buyers from both countries with larger Length x width x height (10-10 mm3) -0.0077* 0.0057
families prefer larger vehicles Family size x length x width x height (10-10 mm3) 0.064*** 0.016
Family size x Engine displacement (litres) 0.0028*** 0.00038
Random parameters (α and β)
Mean
• Existing results: short-run income elasticity Income - rent (105 CNY and 106 INR) (β) -1.68*** 0.12 -2.79*** 0.10
of VKT is 0.28 for India (Chugh and Operating cost per km (CNY or INR) (α) -3.83*** 0.27 -1.61*** 0.13
Standard deviation
Cropper, 2017) and not significant for China Income - rent ( and 106 INR) (β) 0.45*** 0.088 0.31*** 0.088
(Lin and Zeng, 2013) Operating cost per km (CNY/INR) (α) 1.29*** 0.11 1.44*** 0.063
Taste of driving (σ) 0.64*** 0.011 0.40*** 0.0071
Scale factor (µ) 9.53*** 0.90 1.59*** 0.20
Short-run elasticity of vehicle kilometres travel (VKT)
• Existing results: short-run fuel price Income 0.14*** 0.0083 0.12*** 0.0071
elasticities of VKT for USA are also below - Fuel price or operating cost -0.18*** 0.059 -0.28*** 0.049
0.16 (in magnitude) (Goodwin et al., 2004). Number of observations 7894 8951
Number of alternative 81 234
Alternative-specific constants 29 89
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Loglikelihood -39242 19
-52806
 Long-run elasticity
• Increase fuel price by 5% for all car buyers (ceteris paribus) and let consumers adjust their
preference for car type and usage. (Similarly for income)

India China
Our estimate Existing Our estimate Existing
Fuel price elasticity of -0.12 [-0.39, -0.29] -0.15 [-0.50, -0.20]
fuel consumption (Chugh and Cropper, 2017) (Lin and Zeng, 2013)
Income elasticity of fuel 0.15 0.35 0.13 [0.27, 1.24]
consumption (Chugh and Cropper, 2017) (He et al., 2017)

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 Segment-level Purchase Price Elasticity
Market Fuel consumption
Fuel consumption Market Purchase Price
Segments share elasticity (no
elasticity share (105 CNY)
• Own purchase price elasticity of fuel elasticity rebound)
Compact -0.23 -0.24 -0.23 1.6% 0.53
consumption: increase purchase price of all Compact Basic -0.19 -0.19 -0.19 0.2% 0.53
models in segment by 5% and allow Compact Luxury -1.21 -1.23 -1.22 2.6% 2.92
Compact Luxury SUV -1.23 -1.24 -1.23 1.4% 3.13
consumers to choose new car & new VKT.
Compact Mini -0.50 -0.50 -0.50 0.1% 1.42
Compact MPV -0.30 -0.30 -0.30 5.2% 0.63
• Fuel consumption elasticity range: [-3.47,- Compact SUV -0.46 -0.47 -0.46 11.8% 1.21
Compact Upper -0.37 -0.38 -0.37 2.9% 0.85
0.16] for China and [-2.07,-0.38] for India. Large Luxury -3.43 -3.47 -3.43 0.1% 10.15
Large Luxury SUV -3.04 -3.07 -3.04 0.7% 8.57
• Purchase price has a low rebound effect in Large MPV -1.17 -1.19 -1.17 1.1% 2.81
Large SUV -1.10 -1.12 -1.11 4.2% 2.71
both markets – 0.96% for China and 1.40% Midsize -0.46 -0.46 -0.46 20.5% 1.21
for India. Midsize Basic -0.34 -0.35 -0.34 10.6% 0.85
Midsize Luxury -1.74 -1.76 -1.75 2.4% 4.20
Midsize Luxury SUV -1.74 -1.76 -1.74 2.0% 4.40
Midsize MPV -0.60 -0.60 -0.60 0.5% 1.55
Midsize SUV -0.69 -0.70 -0.70 12.4% 1.73
Midsize Upper -0.85 -0.86 -0.85 6.5% 2.10
Midsize Upper
-0.65 -0.65 -0.65 5.0% 1.54
Economy
Mini Van -0.16 -0.16 -0.16 0.8% 0.37
© Copyright National University of Singapore. All Rights Reserved. Small SUV -0.34 -0.34 -0.34 7.6% 21 0.81
Sales-weighted average -0.626 -0.634 -0.628
 Segment-level Fuel Economy Elasticity
Market share Fuel consumption Fuel consumption VKT Market Fuel economy
Segments
• A 1% increase in fuel economy elasticity elasticity elasticity (no rebound) elasticity share (km/litre)
Compact 0.21 -0.63 -0.76 0.33 1.6% 14.7
would, on average, reduce fuel Compact Basic 0.21 -0.63 -0.75 0.34 0.2% 14.6
consumption by 0.603% in China. If Compact Luxury 0.25 -0.56 -0.71 0.41 2.6% 11.3
Compact Luxury SUV 0.26 -0.55 -0.70 0.42 1.4% 11.0
we ignore the VKT effect, these Compact Mini 0.21 -0.62 -0.75 0.34 0.1% 14.4
estimates are 0.743% for China. Compact MPV 0.21 -0.62 -0.75 0.35 5.2% 13.3
Compact SUV 0.22 -0.60 -0.74 0.37 11.8% 12.0
Compact Upper 0.21 -0.63 -0.75 0.34 2.9% 14.3
• Rebound effect of fuel economy Large Luxury 0.29 -0.52 -0.68 0.45 0.1% 10.1
improvement on fuel consumption Large Luxury SUV 0.31 -0.49 -0.66 0.49 0.7% 9.1
Large MPV 0.30 -0.50 -0.67 0.47 1.1% 9.5
is 18.8% for China (17.1% for Large SUV 0.28 -0.53 -0.69 0.44 4.2% 10.0
India). Midsize 0.18 -0.65 -0.78 0.32 20.5% 13.1
Midsize Basic 0.20 -0.63 -0.76 0.33 10.6% 13.7
Midsize Luxury 0.27 -0.54 -0.69 0.43 2.4% 10.5
Midsize Luxury SUV 0.28 -0.52 -0.68 0.45 2.0% 10.0
Midsize MPV 0.26 -0.55 -0.70 0.42 0.5% 11.3
Midsize SUV 0.23 -0.58 -0.73 0.39 12.4% 11.1
Midsize Upper 0.25 -0.57 -0.72 0.40 6.5% 11.3
Midsize Upper Economy 0.23 -0.60 -0.74 0.37 5.0% 12.6
Mini Van 0.21 -0.62 -0.75 0.35 0.8% 14.1
Small SUV 0.22 -0.61 -0.75 0.36 7.6% 12.9
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Sales-weighted average 0.220 -0.603 -0.743 0.366 22
 Revenue Neutral Feebate Policy

• Sales-weighted average fleet fuel economy as the

anchor point

• Lower fee % for China because car models with lower

fuel economy belong to expensive luxury segment India China
Anchor (km/litre) 16.38 12.32
• Rebound effect associated with the feebate policy is Rebate (USD per km/litre) 1407.7 1627.7
Feebate (USD per km/litre) 1846.2 1938.4
7.3% for India and 1.6% for China
Rebate (% retail price) 15.37% 14.56%
Fees (% retail price) 15.24% 7.41%
Fuel economy increase (%) 0.812% 0.795%
Fuel savings (%) 0.703% 0.688%
Fuel savings (%,no rebound) 0.758% 0.699%
Original fuel consumption (litre) 1.8980E+09 2.2819E+10
Final fuel consumption (litre) 1.8847E+09 2.2662E+10
Final fuel consumption (no rebound, litre) 1.8836E+09 2.2660E+10
© Copyright National University of Singapore. All Rights Reserved. Total rebate (million USD) 1.776E+03 2.0570E+04
23
Total fees (million USD) 1.773E+03 2.0569E+04
 Macro-level Models of Energy Demand

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 Descriptive Measures
• Demand elasticity: % change in the demand due to 1% change in driving economic variables.
• Energy Intensity: Energy required per unit of driving economic variable (e.g., GDP)

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 Energy Demand Decomposition Analysis

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 Aims
• Determine the contribution of the following three effects to changes in energy
consumption

• Activity effect: changes in economic activity (i.e., GDP)

• Intensity effect: changes in technological efficiency of energy use (i.e., changes in the
processes and product mixes; e.g., shift away from coal to electricity)

• Structural effect: changes in the economic structure (i.e., sectoral level changes in
economic activities)

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 Change in Total Energy Demand

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 Contribution of a Factor (Laspeyres method)
Base year is 0 and end year is t.
Energy consumption in year t and base year 0 can then be written as

The contribution of different effects to overall change in energy consumption is:

Activity effect

Intensity effect

Structural effect

Total change
Is 𝐸 𝑡 − 𝐸 0 = ∆𝐸? 29
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 Sector-level Effect (Laspeyres method)

Activity effect of Sector 𝑖

Intensity effect of Sector 𝑖

Structural effect of Sector 𝑖

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 Example of Laspeyres method: Results

Activity effect in OECD region

Structural effect in OECD region

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 Example of Laspeyres method

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 Energy Demand Decomposition in Transport
The energy consumption depends on three variables

𝑄𝑖 𝐷𝑖 𝑆𝑃𝑖
𝑇𝐸𝐷 = ෍ 𝑇𝐸𝐷𝑖 = ෍ 𝑄𝑖 𝐷𝑖 𝑆𝑃𝑖 = 𝑄 ෍ = 𝑄 ෍ 𝑆𝑖 𝐷𝑖 𝑆𝑃𝑖
𝑄
𝑖 𝑖 𝑖 𝑖

𝑇𝐸𝐷𝑖 : Total energy demand of vehicle type i;

𝑄𝑖 : fleet size of vehicle type i;
𝑆𝑖 : Fleet share of vehicle type i;
𝐷𝑖 : Distance travelled by vehicle type i;
𝑆𝑃𝑖 : Fuel consumption per unit distance for vehicle type i;

a fleet effect, showing the influence of road fleet variation on the energy consumption
a structural effect, reflecting the impact of variations in the fleet composition on the demand;
a mileage effect, reflecting the impact of changes in the distance traveled;
a technical efficiency effect, reflecting changes in specific consumption of the vehicles.

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