Regional Differences in Subcontract Report - NREL

1 National Renewable Energy Laboratory Innovation for Our Energy Future A national laboratory of the Department of EnergyOffice of Energy Efficiency & Renewable EnergyNREL is operated by Midwest Research Institute Battelle Contract No. DE-AC36-99-GO10337 Regional Differences in the Price- elasticity of demand for Energy Bernstein and J. Griffin RAND Corporation Santa Monica, California Subcontract Report NREL/SR-620-39512 February 2006 Regional Differences in the Price- elasticity of demand for Energy Bernstein and J. Griffin RAND Corporation Santa Monica, California NREL Technical Monitor: D. Arent Prepared under Subcontract No. KACX-4-44454-01 Subcontract Report NREL/SR-620-39512 February 2006 National Renewable Energy Laboratory 1617 Cole Boulevard, Golden, Colorado 80401-3393 303-275-3000 Operated for the Department of Energy Office of Energy Efficiency and Renewable Energy by Midwest Research Institute Battelle Contract No.

2 DE-AC36-99-GO10337 This publication was reproduced from the best available copy Submitted by the subcontractor and received no editorial review at NREL NOTICE This Report was prepared as an account of work sponsored by an agency of the United States government. Neither the United States government nor any agency thereof, nor any of their employees, makes any warranty, express or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of any information, apparatus, product, or process disclosed, or represents that its use would not infringe privately owned rights. Reference herein to any specific commercial product, process, or service by trade name, trademark, manufacturer, or otherwise does not necessarily constitute or imply its endorsement, recommendation, or favoring by the United States government or any agency thereof.

3 The views and opinions of authors expressed herein do not necessarily state or reflect those of the United States government or any agency thereof. Available electronically at for a processing fee to Department of Energy and its contractors, in paper, from: Department of Energy Office of Scientific and Technical Information Box 62 Oak Ridge, TN 37831-0062 phone: fax: email: for sale to the public, in paper, from: Department of Commerce National Technical Information Service 5285 Port Royal Road Springfield, VA 22161 phone: fax: email: online ordering: on paper containing at least 50% wastepaper, including 20% postconsumer waste Preface About This Analysis Each year, the Department of Energy (DOE) requires its research programs to estimate the benefits from their research activities. These estimates are part of the programs annual budget submissions to the DOE, and they are also required under the Government Performance and Review Act.

4 Each program in the DOE s Office of Energy Efficiency and Renewable Energy (EERE) is responsible for providing its own assessment of the impact of its technology research and development (R&D) programs. For the most part, the benefit estimates from each EERE program office are made at the national level, and the individual estimates are then integrated through the use of the National Energy Modeling System to generate an aggregate set of benefits from the EERE s various R&D programs. At the request of the National Renewable Energy Laboratory (NREL), the RAND Corporation examined the relationship between energy demand and energy prices with the focus on whether the relationships between demand and price differ if these are examined at different levels of data resolution. In this case we compare national, Regional , state, and electric utility levels of data resolution. This study is intended as a first step in helping NREL understand the impact that spatial disaggregation of data can have on estimating the impacts of their programs.

5 This Report should be useful to analysts in NREL and other national laboratories, as well as to policy nationals at the national level. It may help them understand the complex relationships between demand and price and how these might vary across different locations in the United States. iii The RAND Environment, Energy, and Economic Development Program This research was conducted under the auspices of the Environment, Energy, and Economic Development Program (EEED) within RAND s Infrastructure, Safety and Environment Division. The mission of RAND s Infrastructure, Safety and Environment is to improve the development, operation, use, and protection of society s essential man-made and natural assets and to enhance the related social assets of safety and security of individuals in transit and in their workplaces and community. The EEED research portfolio addresses environmental quality and regulation, energy resources and systems, water resources and systems, climate, natural hazards and disasters, and economic development both domestically and internationally.

6 EEED research is conducted for government, foundations, and the private sector. Questions or comments about this Report should be sent to the project leader, Mark Bernstein Information about the Environment, Energy, and Economic Development Program is available online ( ). Inquiries about EEED projects should be sent to the Program Director iv Table of Contents iii About This Analysis .. iii The RAND Environment, Energy, and Economic Development Program .. iv Table of v Figures and Tables .. vii Executive Summary .. ix Are There Regional Differences in the Price- demand Relationship? .. x xiii : 1 Chapter 1 Relationship Between Energy Efficiency and Price elasticity .. 6 Analytical Approach .. 7 Summary of 8 Organization of This Report .. 9 Chapter 2: Economic Theory, Literature, and Methodological Approach .. 10 Previous Literature on Energy 10 Estimation Approach.

7 12 : National-Level 16 Chapter 3 Residential Electricity 16 Commercial Electricity .. 18 Natural Gas .. 20 Summary of National-Level 22 Chapter 4: Regional Commercial Electricity Results .. 30 Residential Natural Gas .. 32 Regional Analysis Conclusions .. 36 Chapter 5: State-Level Analysis .. 37 Residential 37 Commercial Electricity .. 42 Residential Natural Gas .. 44 State-Level Conclusions .. 46 Chapter 6: Utility-Level 47 Chapter 7: Conclusions, Final Thoughts, and Implications of .. 50 Should DOE Disaggregate Data for Estimating Energy-Efficiency Programs Benefits? Price elasticity of demand .. 51 Bibliography .. 54 Appendix 56 Details on the Methodology Used to Estimate 56 Parameter 58 Trend Analysis .. 61 Appendix B .. 63 Data Sources .. 63 Energy Data .. 63 Economic 63 v Climate Data ..63 Appendix C: Variables and How They Were Constructed.

8 64 Appendix D: Regression Analysis Results ..67 National-Level Residential Commercial Electricity ..68 Residential Natural Gas ..70 Regional -Level Residential Commercial Electricity ..73 Residential Natural Gas ..75 State-Level Results ..77 Residential Commercial Electricity ..80 Natural Gas ..83 Utility-level Results from Energy Use Trend Region-Level Residential Commercial Electricity ..92 Natural Gas ..93 State-Level Results ..94 Residential Commercial Electricity ..97 Natural Gas ..99 vi Figures and Tables Figure : Relationship of supply and demand with two different demand 3 Figure : Impact of a shift in the supply curve ..4 Figure : Impact of a shift in the demand Figure : Residential Electricity Prices, demand , and Intensity, 1977 Table : Results of Regression Analysis of Residential Electricity demand , 1977 Figure : Commercial Electricity Prices, demand , and Intensity, 1977 Table : Regression Analysis Results for Commercial Electricity demand .

9 20 Figure : Residential Natural Gas Prices, demand , and Intensity, 1977 2003 ..21 Table : Regression Analysis Results for Residential Natural Gas demand ..22 Table : Price Elasticities for Residential Electricity, Commercial Electricity, and Residential Natural Gas at the National Figure : DOE Energy Information Agency Census Regions ..24 Figure : Regional Trends in Per-Capita Residential Electricity-Intensity, 1977 Figure : Regional Trends in Average Expenditures on Residential Electricity, 1977 Figure : Regional Trends in Average Expenditures on Residential Electricity as a Share of Income, 1977 Figure : Estimated Short-Run Residential-Electricity Price Elasticities by Region, 1977 Figure : Estimated Long-Run Residential-Electricity Price Elasticities by Region, 1977 Figure : Regional Trends in Commercial Electricity Use per Square Foot of Office Space, 1977 1999.

10 31 Figure : Short-Run Commercial Electricity Price Elasticities by Region, 1977 Figure : Long-Run Commercial Electricity Price Elasticities by Region, 1977 Figure : Natural-Gas Intensity Trends by Region, 1977 Figure : Natural-Gas Price Trends by Region, 1977 Figure : Short-Run Natural-Gas Price Elasticities by Region, 1977 Figure : Long-Run Natural Gas Price Elasticities by Region, 1977 Figure : State-Level Trends in Residential Electricity Intensity, 1977 2004 ..38 Figure : State-Level Trends in Residential Electricity Expenditures as a Share of Income, 1977 Figure : Estimates of Short-Run Residential Electricity Price Elasticities for Each State, 1977 Figure : Estimated State-Level Short-Run Price Elasticities for Residential Electricity, 1977 Figure : Estimated State-Level Long-Run Price Elasticities for Residential Electricity, 1977 Figure : Estimated State-Level Trends in Electricity Intensity in the Commercial Sector, 1977 vii Figure : Estimated Short Run Elasticities in Electricity Intensity in the Commercial Sector at the State Level, 1977 1999.