Short- and Long-Run Electricity Demand Elasticities at the Subsectoral Level: A Cointegration Analysis for German Manufacturing Industries

FCN Working Paper No. 19/2010

31 Pages Posted: 22 Dec 2010

See all articles by Ronald Bernstein

Ronald Bernstein

RWTH Aachen University - E.ON Energy Research Center

Reinhard Madlener

RWTH Aachen University

Date Written: November 2010

Abstract

In this paper we use multivariate cointegration analysis to estimate electricity demand elasticities at the subsectoral industry level. This enables us to reap the benefits of lower heterogeneity within the electricity-consuming sectors investigated and of retaining additional information otherwise blurred by aggregation. The annual data set used covers eight subsectors of the German economy for the period 1970-2007. By employing a cointegrated VAR model specification and accounting for structural breaks we find cointegration relationships for five of the eight subsectors studied. The long-run elasticities range between 0.70 and 1.90 for economic activity and between –0.52 and zero for the price of electricity. The short-run elasticities are estimated by single-equation error-correction modeling and found to be between 0.17 to 1.02 for economic activity and –0.57 to zero for electricity price. Granger-causality tests indicate that in the long term causality runs from both economic activity and electricity price to electricity consumption, while Granger-causality from electricity price and electricity consumption to economic activity is detected in only two subsectors. Electricity price is found to be Granger-caused neither in the long nor the short run. Finally, an impulse response analysis yields plausible results confirming the usefulness of the approach adopted.

Keywords: Disaggregated data, Elasticities, Cointegration, VECM, Granger-causality, Impulse responses, Structural breaks, Germany

JEL Classification: Q41, Q43

Suggested Citation

Bernstein, Ronald and Madlener, Reinhard, Short- and Long-Run Electricity Demand Elasticities at the Subsectoral Level: A Cointegration Analysis for German Manufacturing Industries (November 2010). FCN Working Paper No. 19/2010, Available at SSRN: https://ssrn.com/abstract=1729732 or http://dx.doi.org/10.2139/ssrn.1729732

Ronald Bernstein (Contact Author)

RWTH Aachen University - E.ON Energy Research Center ( email )

Mathieustrasse 6
Aachen, 52074
Germany

Reinhard Madlener

RWTH Aachen University ( email )

School of Business and Economics / E.ON ERC
Mathieustraße 10
Aachen, 52074
Germany
+49 241 80 49 820 (Phone)
+49 241 80 49 829 (Fax)

HOME PAGE: http://www.eonerc.rwth-aachen.de/fcn

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