Why has the OECD long-run GDP elasticity of economy-wide electricity demand declined? Because the electrification of energy services has saturated

Brantley Liddle, Steven Parker and Fakhri Hasanov

Energy Economics, 2023, vol. 125, issue C

Abstract: Understanding the income/GDP and price elasticities of energy/electricity demand is important for forecasting demand and evaluation of the potential impact of policies. Recent work on the GDP elasticity of economy-wide electricity demand has suggested that this elasticity is both substantially smaller than that of economy-wide energy demand and possibly has declined substantially over time. We assemble the largest OECD country panel to date to analyze the GDP and price elasticities of economy-wide electricity demand. We use an approach that addresses several key aspects of long-panel, macro modeling—cross-sectional dependence, country heterogeneity, and dynamic adjustments—and approximates temporal heterogeneity. We find that: (1) the GDP elasticity of economy-wide electricity demand has declined over time; and (2) that elasticity is now possibly as low as 0.2. In addition, we produce evidence that the reason for that decline is the saturation of the electrification of energy services in OECD countries. Hence, were more energy services to become electrified (e.g., transport), we would expect the GDP elasticity of economy-wide electricity demand to increase (e.g., toward 0.5—the GDP elasticity for gasoline demand). This saturation finding is important for forecasts of electricity consumption as well as for climate change mitigation policy; the finding is important because suggests that substantially increasing the electrification of energy services—one of two prongs in a carbon mitigation strategy—will/may lead to an increase in the GDP elasticity for electricity as well as to the potentially rapid increase in electricity consumption.

Keywords: GDP and price elasticities of electricity demand; OECD panels; Rolling window regressions; Panel heterogeneity; Electrification of energy services; DCCE estimator (search for similar items in EconPapers)
JEL-codes: C22 C33 C51 O13 Q43 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:125:y:2023:i:c:s0140988323003304

DOI: 10.1016/j.eneco.2023.106832

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