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Residential demand for energy in Jamaica
Residential demand for energy in Jamaica Harridutt Ramcharran
The rapid increase in the price of energy, beginning in 1974, had a disastrous eflect on the energy-intensive economy of Jamaica; therefore, the government adopted a national energy plan with the substitution of indigenous sources of energy as one qf the main goals. The results of our studies, based on estimating the consumption of electricity, LPG, and kerosene, show that the household sector made sign$cant adjustment in substituting indigenous charcoal for the more expensive and imported LPG and kerosene. Keywords: Liquid
petroleum
gas (LPG);
The staggering economic impact of the oil price increases by OPEC in 1973/74 and in 1979/80 is still felt among the oil importing less developed countries (LDCs) to the extent that these countries are still battling with accumulated external debt, slow economic growth, and continuing balance of payments problems. The decisions of OPEC and their consequences have hastened many oil importing countries (both developed and less developed) to develop national energy plans to focus on both shortand long-term strategies. Some of these plans have been discussed by de Lucia and Jacoby [3] and Dunkerley et al [6]. Most of these strategies aim at reducing dependency on imported energy, conserving and efficiently using energy, and exploring and developing alternative (local or indigenous) sources of energy; and these strategies are analysed within the framework of energy demand management by Bharier [l] and energy supply management by Smith [21]. Although the price of oil in the world market has been relatively stable so far in the 1980s higher energy cost is still a major problem for most of the oil
The author is with the Department of Finance, College of Business Administration, The University of Akron, Akron, Ohio 44325, USA. Final manuscript
received
0140-9883/88/030223-06
20 January
$03.00
1988.
0
1988 Butterworth
Charcoal;
Kerosene
importing
LDCs for three main reasons:
(i) constant devaluation of their currencies to correct external imbalances; (ii) the fall in the prices of their main exports (commodities);’ and (iii) heavy dependence by most of these countries on imported energy. It is evident that further analyses of energy use and the energy policies of these countries are very important. Most quantitative or analytical assessments of energy use and alternative energy policies usually focus on the impact of higher energy prices on the reallocation of expenditures between different forms of energy (inter-fuel substitution) and between energy and non-energy products and the role of income (economic growth) in determining the rate of increase in the demand for energy. Most of these studies either focus on the demand for a special type or source of energy (electricity or gasoline) or the demand for energy by different sectors (manufacturing, electricity generation, transport, household) of the economy. These results vary depending on the possibility of inter-fuel substitution, the vintage of the stock of energy-using appliances, and government policies, particularly on energy pricing and conservation.
’ Discussed in Johnson [12] and ‘The sharp fall in commodity CW.
& Co (Publishers)
Ltd
price’
223
The purpose of this paper is to analyse the demand for energy by the household (residential) sector of Jamaica for the period 1970-83, during which there were rapid increases in the price of energy and also government policies (particularly energy pricing) for energy conservation. In Jamaica, like most LDCs, household demand is primarily for cooking and lighting.2 Our study will focus on the demand for three forms of energy: electricity, kerosene, and liquified petroleum gas (LPG).
a little over 1% of total commercial energy during the period 1978-83, while bagasse (non-commercial) in terms of fuel oil equivalent (FOE) was about 7.5 % of total commercial and non-commercial energy during this period. Cooking fuels (LPG and kerosene) comprise about 4.5 % of total petroleum consumption, while electricity (power generation) comprises about 20% (Table 2). The disastrous efffects of rising energy prices on the economy of Jamaica are partly reflected in the data presented in Table 3. These effects have forced the government to pursue a national energy plan (see Appendix).
Background The demand for energy is derived in that it is derived from the services that are provided. These services can be provided with different energy sources and with different degrees of efficiency. Energy management involves the selection of the most efficient way. Energy management in LDCs could be a complex process since energy consumption is underestimated because of the utilization of non-commercial sources of energy, such as firewood, crop residues, charcoal, animal waste, and animal and human power, etc. These sources are important mainly in the rural areas.3 Jamaica imports about 90% of its energy requirement; the remainder is comprised of indigenous sources of hydro-electricity, bagasse, charcoal and firewood. Table 1 shows that hydro-power comprised
2Dunkerley et al [6] estimated that cooking alone constitutes 80% of total household energy use. ‘See Cecelski, Dunkerley and Ramsay ([4]. Chapter 1 I.
Table I.
Jamaica’s
commercial
and non-commercial
Methodology and data The earlier studies on energy policy focused on the problems of the developed countries; some of these included the works of Jorgenson 1133, Fuss [93, Pindyck [18], Nordhaus [16], and Brendt and Wood [2]. In these studies econometric models were used to estimate the price elasticity of demand, the cross-price elasticity of demand, etc to examine changes in the demand (consumer’s expenditure) in response to the increase in the price of energy, or the elasticity of substitution between energy and non-energy inputs when the price ofenergy increases. These studies mainly involved the use of the translog utility function or cost function. Because of the inadequate data on energy consumption and prices in LDCs, it is difficult to study the characteristics of energy demand on an empirical
about
energy consumption: 197843.
1981
1982
1983
16 733 392 268 1681 1702 168 8711
15 878 398 260 1703 1404 156 8904
Energy source
1978
1979
1980
Petroleum (bbl x 103) Aviation gas Turbo fuel Liquid petroleum gas Kerosene Gasoline Auto diesel oil Marine diesel oil Fuel oil
17 675 449 437 1755 1479 159 1I 734
19 871 417 389 1637 I636 182 I I 385
16 749 350 282 1445 1350 155 I I 210
11499
Total petroleum Fuel oil equivelent
16705 16227
16565 16095
15557 15 135
15784 15 354
13671 13 196
134 235 1.55
133 233 1.5
127 232 1.76
80.6 141 1.06
(FOE)
115 202 1.24
Hydro-power (kWh x 10h) FOE (bbl x 103) As a % of commercial energy Total commercial Non-commercial
energy FOE energy FOE (bagasse)
Total commercial FOE
and non-commercial
Sourw:
of Mining
224
Ministry
and Energy
108 189 1.17
16 685 367 262 1536 1237 182
13728 13355
16429 I 507
16284 1249
15370 1 163
15587 1150
1342X 1233
13578 1 240
17936
17533
16533
16737
14661
14818
(quoted
from Socid und Economic
Survey of Jutnaica, 1981 and
ENERGY
1983).
ECONOMICS
July 1988
Residential
Table 2.
Jamaica’s
demand.fbr
1981
H. Ramcharran
1982
1983
Bbls X lo3
% of total
Bbls x IO3
% of total
Bbls x 10’
% of total
8 103 2967 701 302 1964 4 754 231 180 187 2681 629 846
51.2 18.7 4.4 1.9 12.4 30.0 1.5 1.1 1.2 16.9 4.0 5.3
5 430 3083 749 281 2053 5 667 342 210 143 2 888 660 1424
38.3 21.7 5.3 2.0 14.4 40.0 2.4 1.5 1.0 20.4 4.6 10.0
5 345 3310 893 237 2180 5909 383 239 104 3 090 657 1436
36.7 22.7 6.1 1.6 15.0 40.6 2.6 I.6 0.7 21.2 4.5 9.9
100
14 180
100
Bauxite/alumina Transport Aviation Shipping Road and rail Industrial/commercial Cement manufacturing Oil refining Sugar processing Power generation Cooking fuels” Othersb Total
15824
Source: Ministry of Mining and Energy (quoted from Economic and Social Survey o/Jamaica, “Cooking fuels include LPG and kerosene. bAccounts for only automotive diesel, marine diesel, and Bunker C fuels.
Oil import
bill as a percentage
Total oil bill
Year
in Jamaica:
petroleum consumption by activity: 1981-83.
Activity
Table 3.
energy
of total imports/exports
(current
14564
100
1983).
costs).
Oil bill as percentage of imports
Oil bill as percentage of exports
Trade imbalance
5.33 6.65 9.76 9.86 20.80 18.53 21.95 36.02 27.16 33.00 38.10 33.50
8.36 11.14 16.34 17.14 27.10 24.87 32.48 40.60 32.37 41.10 46.30 50.73
(190.5) (211.4) (236.4) (307.7) (217.5) (286.5) (295.8) ( 68.7) (127.8) (196.5) (206.7) (389.0)
(US% X 106)
1970 1971 1972 I973 1974 1975 1976 1977 1978 1979 1980 1981 Source:
28.0 36.7 57.3 71.5 194.7 208.2 200.4 219.6 215.6 331.2 444.4 495.6 Jamaican Narional
Energy Policy and Programme, Ministry
basis. These problems have been emphasized by Dunkerley et al [6] and also by Pindyck [18], who contended that demand analyses based on the notion that consumers maximize a well-behaved utility function may not be applicable to many LDCs, and in many sectors consumption decisions are influenced more by supply availability than by price. Studies by Pindyck Cl83 and Samouilidis and Mitropoulos [19] on energy use in LDCs use the dynamic Cobb-Douglas demand function, usually specified as: lnE, = a, + hlnP, + cln Y, + dnE, _ I where E, =
per capita consumption
P, = relative
ENERGY
of energy
price of energy
ECONOMICS
July 1988
(1)
of Mining
and Energy,
1983, p 10.
Y, = per capita E,...
real income
1 = per capita consumption previous period
of energy
in the
We adopt a similar approach. One of the advantages of using this model is that the results enable one to differentiate between short-run and long-run elasticities. The short-run price and income elasticities of demand are the estimated coefficients of h and c, respectively, while the long-run price and income elasticities are b/( 1 - d), and c/( 1 - d), respectively. This differentiation is necessary to analyse adjustment in habit formation (lifestyle) that is associated with increasing energy prices and adjustment in the capital stock of energy-using appliances when energy prices increase. According to Houthakker, Vergler and Sheehan ([lo], p 412), ‘Complete adjustment often takes years, and it is therefore useful to distinguish
225
Residenrial
dernand,for
energy
in Jamaica:
H. Ramcharran
between short-run and long-run elasticities’. The limitation of this model is that the results may not fully reflect actual demand since the demand for energy is ‘derived’. The sources of data are as follows: quantity of kerosene and LPG consumed, The National Energy Outlook [14]; the prices of LPG, Jamaica National Energy Policy and Programme [ 1 l] and data provided by the Petroleum Corp of Jamaica; the price of kerosene and the CPI, Consumer Price Indices: Annual Review (various issues) [S]; average consumption of electricity, the number of customers and the price of electricity, Economic and Social Survey of Jamaica (various issues) [7]; and per capita income, National Income and Product (various issues) [15]. The CPI is used as the deflator of real per capita income and of all relative prices.
Results
on the significance of the coefficient of the lagged dependent variable. The rate of adjustment is 0.54 (1 - 0.46) for kerosene: this indicates a long-run price elasticity of -0.46 and income elasticity of 0.80. while the rate of adjustment for LPG is 0.45. indicating a long-run income elasticity of 1.22. Both rates of adjustment are rather modest. One could attribute the insignificant rate of adjustment in the demand for electricity to the increasing prices of imported fuel to price and income inelasticity of demand and the high cost of changing electricity-using appliances, eg refrigerators, electric stoves, lighting appliances, etc. Since the results indicate that the demand for LPG and for kerosene adjusted significantly during this period, an attempt was made to investigate what could be the contributory factors, particularly inter-fuel substitution. We regress separately per capita consumption of LPG and kerosene on the following independent variables - the real price of kerosene (PK), the real price of LPG (PG), the real price of electricity (PE), the real price of charcoal (PC), real per capita income (RY), and t (time period) to approximate any shift in demand. Our results (with t statistics in parentheses) are:
We do two sets of estimation. First, using Equation (l), we estimate the demand for kerosene and LPG; then, using Equation (l), but including the number of customers as another independent variable, we estimate the demand for electricity.4 The inclusion of this variable vastly improves the significance of our estimation. The results indicate that the price coefficient is significant for kerosene and for electricity; in both cases it is less than 1. This suggests price inelasticity. The real income coefficient is significant for all three energy types; they are also less than 1, suggesting income inelasticity. Overall, our results indicate that the demand for residential energy is both price and income inelastic, particularly in the case of the demand for electricity. The coefficient for the number of customers for the demand for electricity is significant at the 99% level. This result is consistent with Pindyck’s [ 181 contention that urban migration may also contribute to a rapid growth rate of household energy demand in developing countries.’ Jamaica has experienced rapid rural to urban migration over the last few decades and, like most LDCs, the availability of electricity is still concentrated in the few urban areas. In terms of long-term adjustment. significant results are obtained only for LPG and kerosene; this is based
*coefficient **coefficient ***coefficient
4For the residential demand for electricity, the dependent variable is the average kWh used per year. the independenr variables are: (i) the rate charged (cents/kWh) deflated by the Consumer Price Index, (ii) real per capita income. (iii) average number of residential customers, and (iv) the lagged value (1 year) of the dependent variable. Data on block-prices for electricity are not available. ‘Pindyck (1183, p 251).
For both LPG and kerosene. the coefficient for t is significant; however. the values are less than one. For LPG it is 0.408 and for kerosene 0.29. This indicates that there has been a slow increase in the demand for both LPG and kerosene; a plausible reason is the substitution of a cheaper source of energy. In both cases the respective price coefficient is not significant
226
In QI, = - 72.8 - 0.34 In P, + 5.46 In R Y (-0.56)
(2.49)*
-0.36lnP,+ (-0.28) R2 = 62
l.l6lnP,-0.18lnP,+0.29t (2.00)* ( - 0.118) F=
19
(2.27)*
DW = 2.3
LPG lnQ,=
-90.1
-0.29lnP,-O.l5lnP,+
1.7lnPc
( - 0.23)
(-0.212)
(1.89)***
- 0.35 In P, + 6.47 In R Y + 0.4081 ( - 0.203) R2 = 69
(2.7)* F = 26
is significant is significant is significant
ENERGY
(2.9)** DW = 2.3
at 95% confidence at 99% confidence at 90% confidence
ECONOMICS
level level level
July 1988
Residential
Table 4.
Regression results the demand for kerosene, LPG
demand,fk
energy
in Jamaica:
H. Ramcharran
and electricity.
Relative price
Real income
Number of customers
hYi!g~ dependent
R2
F
DW
0.43 (2.03)b
0.46 (5.12)
98.5
20.7
2.2
0.15 (0.8 1)
0.55 (2.27)b
0.55 (3.87)
75
9.3
1.96
- 0.0837 (-2.14)b
0.0762 (7.5)
- 0.0024 0.90)
99
159
2.19
Energy types
Constant
Kerosene
-3.23
-0.25 (-5.9)
LPG
- 5.05
Electricity
-0.529
1.25 (16.5)*
(-
Note: t statistics are in parentheses “Coefficient is significant at 99% confidence level. “Coefficient is significant at 95% confidence level.
and kerosene are used for cooking. substitution would have involved changes appliances.
although the expected sign is correct. The real income elasticity for both is significant and has increased significantly, the values indicating that the demand for both LPG and kerosene is highly income elastic. Any indication of inter-fuel substitution is indicated by the cross-price elasticity coefficient. Our results indicate that the coefficient for charcoal has the correct sign and is significant in both cases, at the 95% level for kerosene and at the 90% level for LPG; the respective values are slightly greater than one, 1.16 in the case of kerosene and 1.7 in the case of LPG. The cross-price elasticity coefficients of the other energy sources are not significant. The reasons could be explained with the help of the results presented in Table 5. It is important to note that cooking accounts for the largest portion of household energy demand. First, although the bulk of LPG and kerosene is used for cooking, the results of our model indicate no evidence of substitution; this could be attributed to the high cost of switching kerosene stoves with gas stoves and vice vet-w. Second, electricity is no substitute for either LPG or kerosene since only a small portion of electricity is used for cooking while most LPG
Table 5.
Conclusion In our study on the residential demand for energy our results show that (i) the demand for the main sources (electricity, LPG, and kerosene) is both price and income inelastic; (ii) consumers made some long-run adjustment in their demand for kerosene and LPG; and (iii) charcoal is a substitute for both kerosene and LPG. One of the objectives of the national energy plan is to encourage the use indigenous sources of energy. The prices of both LPG and kerosene were further increased by the removal of subsidies to encourage the use of charcoal. Our results indicate that the household sector has substituted charcoal for the more expensive LPG and kerosene. The effectiveness of this policy in the long run depends on the extent to which charcoal production is increased and distributed efficiently. In
1979 household survey energy sources and use.
Energy source
Electricity
End use
MBOE
Cooking Refrigeration Lighting Ironing
65.3 230.5 154.6
8.7 30.7 20.6
63.8 59.3 12.0
8.5 7.9 1.6
~ ~
Others’
165.2
22.0
~
Total
750.7
100.0
Water heating Air conditioning
Percentage of total
Kerosene %
50.9
MBOE
LPG %
MBOE
305.1 24.1 72.9
73.3 5.8 17.5
14.2
3.4
ECONOMICS
171.8 0.9
10.3
416.3
100.0
28.2
“Miscellaneous and unspecified household service. MBOE = million barrels of fuel oil equivalent. Source: Jamuica’s Nnrional Energy Policy and Progrummc,
ENERGY
Also, any in cooking
July 1988
183.0
Charcoal %
MBOE
93.9 0.05
72.2 ~~
5.6
12.4 ~
100.0
12.4
Ministry
84.6 5.7
of Mining
Fuelwood %
MBOE
85.3
34.9
14.7
6.0
Total % 85.3
_
loo.0
40.9
14.7
MBOE 643.4 256.8 227.2
% 43.6 17.4 15.4
-
98.9 69.3 11.8
6.7 4.7 0.8
-
168.2
11.4
1475.5
100.0
100.0
2.8
100
and Energy, 1983, Table 52, p 85.
227
Residential
demand,for
energy in Jamaica:
H. Ramcharran
terms of increasing charcoal production, the environmental consequences, among other costs, have to be considered.
Appendix The national energy plan incorporates previous initiatives. The main objectives
and builds upon of the plan are:
(9 to reduce
References 1
2
3
4
5 6
10
11 12
13
14 15 16
17 18 19
20 21
228
Julian Bharier, ‘Energy demand management’, in Energy Planning in Developing Countries, Oxford University Press, New York, 1984, pp 25-35. E. R. Brendt and D. Wood, ‘Technology, prices and the derived demand for energy’, The Review of Economics and Statistics, Vol 57, August 1975, pp 259-268. R. J. de Lucia and H. Jacoby, eds, Energy Planning for Developing Countries: A Study of Bangladesh, Johns Hopkins University Press, Baltimore, 1982. E. Cecelski, J. Dunkerley, and W. Ramsay, Household Energy and the Poor in the Third World, Resources for the Future, Washington, DC, 1979. Consumer Price Indices: Annual Review, Statistical Institute of Jamaica, Kingston, 1983. J. Dunkerley, W. Ramsay, L. Gordon and E. Cecelski, Energy Strategies for Developing Nations, Johns Hopkins University Press, Baltimore, 1981. Economic and Social Survey of Jamaica, National Planning Agency, Kingston, 1983. Energy Planning in Developing Countries, Oxford University Press, New York, 1984. M. A. Fuss, ‘The demand for energy in Canadian manufacturing’, Journalof Econometrics, Vol5, January 1977, pp 89-l 16. H. S. Houthakker, P. Vergler and P. Sheehan, ‘Dynamic demand analyses for gasoline and residential electricity’, American Journal of Agricultural Economics, Vol 56, May 1974, pp 412418. Jamaica ‘s National Energy Police and Programme, Ministry of Mining and Energy, Kingston, 1983. 0. E. G. Johnson, ‘Currency depreciation and export expansion’, Finance and Development, Vol 24, March 1987, pp 23-26. D. Jorgenson, ‘Consumer demand for energy’, in W. D. Nordhaus, ed, International Studies in the Demand for Energy, North Holland, New York, 1977, pp 309-328. The National Energy Outlook, Petroleum Corporation of Jamaica, Kingston, 1983. National Income and Product, Statistical Institute of Jamaica, Kingston, 1983. ‘The demand for energy: an W. D. Nordhaus, international perspective’, in W. D. Nordhaus, ed, International Studies in the Demand.for Energy, North Holland, New York, 1977, pp 239-285. W. D. Nordhaus, ed, InternationalStudies in the Demand for Energy, North Holland, New York, 1977. R. S. Pindyck, The Structure af World Energy Demand, MIT Press, Cambridge, MA, 1980. J. E. Samouilidis and C. S. Mitropoulos, ‘Energy and economic growth in developing countries: the case of Greece’, Energy Economics, Vol 6, July 1984, pp 191-202. ‘The sharp fall in commodity prices 1984-86’, Finance and Development, Vol 23, December 1986, p 45. Stanton Smith, ‘Energy supply management’, Energy Planning in Developing Countries, Oxford University Press, New York, 1984, pp 36-52.
dependency on imported energy and to diversify the present energy supply mix: (ii) to promote the efficient and effective utilization ofenergy while seeking to sustain economic growth; (iii) to accelerate exploration for and the development of indigenous energy supply sources: and (iv) to cushion the impact of continually increasing energy prices on the low-income groups of society while adopting pricing policies appropriate to achieving the above three objectives. The plan is divided into three phases: the short term (1981-85) the mid term (1985-90) and the long term (199&2000). Outlined below is a schedule of the plan.
The short term (i) Conservation in industrial and transport sectors. (ii) Implementation of slow speed diesel in the public utility system. (iii) Alternative energy projects such as the use of coal by the public utilities and specific industries. solar water heaters for domestic, commercial, and residential uses. (iv) The development of small and medium scale hydropower. (v) Research and development work on the use of alcohol in the transport sector from bio-mass sources.
The mid term (4 Energy conservation in transport and industry. (ii) The utilization of coal for electricity in specific industries and in the Jamaica Public Service Company (JPS Co) system. (iii) Ocean thermal energy conversion (OTEC) for electricity generation. (the Blue Mountain Multi(iv) Large scale hydro-power purpose Project). (v) Utilization of peat as a fuel for electricity generation. wastes (garbage and sewage) for power (vi) Urban generation, depending on viability of the collection system. (vii) Liquid fuels from vegetable oils. and application of appropriate (viii) Further development technology for utilizing biomass for energy production. (ix) Expansion of biogas applications in the rural areas for cooking gas, electricity, and refrigeration as well as in schools and small urban projects. of solar water heating programmes (x) The continuation and the development and utilization of solar thermal energy for power generation.
The long term (i) (ii) (iii) (iv) (v)
Ocean thermal energy conversion (OTEC). Solar ponds for electricity generation. High temperature (concentrating) solar collectors, Large wood-based electricity generation. Use of urban waste for electricity generation.
Source:
Economic and Social Survey of Jamaica, Planning Agency, 1981.
ENERGY
ECONOMICS
National
July
1988
The rapid increase in the price of energy, beginning in 1974, had a disastrous eflect on the energy-intensive economy of Jamaica; therefore, the government adopted a national energy plan with the substitution of indigenous sources of energy as one qf the main goals. The results of our studies, based on estimating the consumption of electricity, LPG, and kerosene, show that the household sector made sign$cant adjustment in substituting indigenous charcoal for the more expensive and imported LPG and kerosene. Keywords: Liquid
petroleum
gas (LPG);
The staggering economic impact of the oil price increases by OPEC in 1973/74 and in 1979/80 is still felt among the oil importing less developed countries (LDCs) to the extent that these countries are still battling with accumulated external debt, slow economic growth, and continuing balance of payments problems. The decisions of OPEC and their consequences have hastened many oil importing countries (both developed and less developed) to develop national energy plans to focus on both shortand long-term strategies. Some of these plans have been discussed by de Lucia and Jacoby [3] and Dunkerley et al [6]. Most of these strategies aim at reducing dependency on imported energy, conserving and efficiently using energy, and exploring and developing alternative (local or indigenous) sources of energy; and these strategies are analysed within the framework of energy demand management by Bharier [l] and energy supply management by Smith [21]. Although the price of oil in the world market has been relatively stable so far in the 1980s higher energy cost is still a major problem for most of the oil
The author is with the Department of Finance, College of Business Administration, The University of Akron, Akron, Ohio 44325, USA. Final manuscript
received
0140-9883/88/030223-06
20 January
$03.00
1988.
0
1988 Butterworth
Charcoal;
Kerosene
importing
LDCs for three main reasons:
(i) constant devaluation of their currencies to correct external imbalances; (ii) the fall in the prices of their main exports (commodities);’ and (iii) heavy dependence by most of these countries on imported energy. It is evident that further analyses of energy use and the energy policies of these countries are very important. Most quantitative or analytical assessments of energy use and alternative energy policies usually focus on the impact of higher energy prices on the reallocation of expenditures between different forms of energy (inter-fuel substitution) and between energy and non-energy products and the role of income (economic growth) in determining the rate of increase in the demand for energy. Most of these studies either focus on the demand for a special type or source of energy (electricity or gasoline) or the demand for energy by different sectors (manufacturing, electricity generation, transport, household) of the economy. These results vary depending on the possibility of inter-fuel substitution, the vintage of the stock of energy-using appliances, and government policies, particularly on energy pricing and conservation.
’ Discussed in Johnson [12] and ‘The sharp fall in commodity CW.
& Co (Publishers)
Ltd
price’
223
The purpose of this paper is to analyse the demand for energy by the household (residential) sector of Jamaica for the period 1970-83, during which there were rapid increases in the price of energy and also government policies (particularly energy pricing) for energy conservation. In Jamaica, like most LDCs, household demand is primarily for cooking and lighting.2 Our study will focus on the demand for three forms of energy: electricity, kerosene, and liquified petroleum gas (LPG).
a little over 1% of total commercial energy during the period 1978-83, while bagasse (non-commercial) in terms of fuel oil equivalent (FOE) was about 7.5 % of total commercial and non-commercial energy during this period. Cooking fuels (LPG and kerosene) comprise about 4.5 % of total petroleum consumption, while electricity (power generation) comprises about 20% (Table 2). The disastrous efffects of rising energy prices on the economy of Jamaica are partly reflected in the data presented in Table 3. These effects have forced the government to pursue a national energy plan (see Appendix).
Background The demand for energy is derived in that it is derived from the services that are provided. These services can be provided with different energy sources and with different degrees of efficiency. Energy management involves the selection of the most efficient way. Energy management in LDCs could be a complex process since energy consumption is underestimated because of the utilization of non-commercial sources of energy, such as firewood, crop residues, charcoal, animal waste, and animal and human power, etc. These sources are important mainly in the rural areas.3 Jamaica imports about 90% of its energy requirement; the remainder is comprised of indigenous sources of hydro-electricity, bagasse, charcoal and firewood. Table 1 shows that hydro-power comprised
2Dunkerley et al [6] estimated that cooking alone constitutes 80% of total household energy use. ‘See Cecelski, Dunkerley and Ramsay ([4]. Chapter 1 I.
Table I.
Jamaica’s
commercial
and non-commercial
Methodology and data The earlier studies on energy policy focused on the problems of the developed countries; some of these included the works of Jorgenson 1133, Fuss [93, Pindyck [18], Nordhaus [16], and Brendt and Wood [2]. In these studies econometric models were used to estimate the price elasticity of demand, the cross-price elasticity of demand, etc to examine changes in the demand (consumer’s expenditure) in response to the increase in the price of energy, or the elasticity of substitution between energy and non-energy inputs when the price ofenergy increases. These studies mainly involved the use of the translog utility function or cost function. Because of the inadequate data on energy consumption and prices in LDCs, it is difficult to study the characteristics of energy demand on an empirical
about
energy consumption: 197843.
1981
1982
1983
16 733 392 268 1681 1702 168 8711
15 878 398 260 1703 1404 156 8904
Energy source
1978
1979
1980
Petroleum (bbl x 103) Aviation gas Turbo fuel Liquid petroleum gas Kerosene Gasoline Auto diesel oil Marine diesel oil Fuel oil
17 675 449 437 1755 1479 159 1I 734
19 871 417 389 1637 I636 182 I I 385
16 749 350 282 1445 1350 155 I I 210
11499
Total petroleum Fuel oil equivelent
16705 16227
16565 16095
15557 15 135
15784 15 354
13671 13 196
134 235 1.55
133 233 1.5
127 232 1.76
80.6 141 1.06
(FOE)
115 202 1.24
Hydro-power (kWh x 10h) FOE (bbl x 103) As a % of commercial energy Total commercial Non-commercial
energy FOE energy FOE (bagasse)
Total commercial FOE
and non-commercial
Sourw:
of Mining
224
Ministry
and Energy
108 189 1.17
16 685 367 262 1536 1237 182
13728 13355
16429 I 507
16284 1249
15370 1 163
15587 1150
1342X 1233
13578 1 240
17936
17533
16533
16737
14661
14818
(quoted
from Socid und Economic
Survey of Jutnaica, 1981 and
ENERGY
1983).
ECONOMICS
July 1988
Residential
Table 2.
Jamaica’s
demand.fbr
1981
H. Ramcharran
1982
1983
Bbls X lo3
% of total
Bbls x IO3
% of total
Bbls x 10’
% of total
8 103 2967 701 302 1964 4 754 231 180 187 2681 629 846
51.2 18.7 4.4 1.9 12.4 30.0 1.5 1.1 1.2 16.9 4.0 5.3
5 430 3083 749 281 2053 5 667 342 210 143 2 888 660 1424
38.3 21.7 5.3 2.0 14.4 40.0 2.4 1.5 1.0 20.4 4.6 10.0
5 345 3310 893 237 2180 5909 383 239 104 3 090 657 1436
36.7 22.7 6.1 1.6 15.0 40.6 2.6 I.6 0.7 21.2 4.5 9.9
100
14 180
100
Bauxite/alumina Transport Aviation Shipping Road and rail Industrial/commercial Cement manufacturing Oil refining Sugar processing Power generation Cooking fuels” Othersb Total
15824
Source: Ministry of Mining and Energy (quoted from Economic and Social Survey o/Jamaica, “Cooking fuels include LPG and kerosene. bAccounts for only automotive diesel, marine diesel, and Bunker C fuels.
Oil import
bill as a percentage
Total oil bill
Year
in Jamaica:
petroleum consumption by activity: 1981-83.
Activity
Table 3.
energy
of total imports/exports
(current
14564
100
1983).
costs).
Oil bill as percentage of imports
Oil bill as percentage of exports
Trade imbalance
5.33 6.65 9.76 9.86 20.80 18.53 21.95 36.02 27.16 33.00 38.10 33.50
8.36 11.14 16.34 17.14 27.10 24.87 32.48 40.60 32.37 41.10 46.30 50.73
(190.5) (211.4) (236.4) (307.7) (217.5) (286.5) (295.8) ( 68.7) (127.8) (196.5) (206.7) (389.0)
(US% X 106)
1970 1971 1972 I973 1974 1975 1976 1977 1978 1979 1980 1981 Source:
28.0 36.7 57.3 71.5 194.7 208.2 200.4 219.6 215.6 331.2 444.4 495.6 Jamaican Narional
Energy Policy and Programme, Ministry
basis. These problems have been emphasized by Dunkerley et al [6] and also by Pindyck [18], who contended that demand analyses based on the notion that consumers maximize a well-behaved utility function may not be applicable to many LDCs, and in many sectors consumption decisions are influenced more by supply availability than by price. Studies by Pindyck Cl83 and Samouilidis and Mitropoulos [19] on energy use in LDCs use the dynamic Cobb-Douglas demand function, usually specified as: lnE, = a, + hlnP, + cln Y, + dnE, _ I where E, =
per capita consumption
P, = relative
ENERGY
of energy
price of energy
ECONOMICS
July 1988
(1)
of Mining
and Energy,
1983, p 10.
Y, = per capita E,...
real income
1 = per capita consumption previous period
of energy
in the
We adopt a similar approach. One of the advantages of using this model is that the results enable one to differentiate between short-run and long-run elasticities. The short-run price and income elasticities of demand are the estimated coefficients of h and c, respectively, while the long-run price and income elasticities are b/( 1 - d), and c/( 1 - d), respectively. This differentiation is necessary to analyse adjustment in habit formation (lifestyle) that is associated with increasing energy prices and adjustment in the capital stock of energy-using appliances when energy prices increase. According to Houthakker, Vergler and Sheehan ([lo], p 412), ‘Complete adjustment often takes years, and it is therefore useful to distinguish
225
Residenrial
dernand,for
energy
in Jamaica:
H. Ramcharran
between short-run and long-run elasticities’. The limitation of this model is that the results may not fully reflect actual demand since the demand for energy is ‘derived’. The sources of data are as follows: quantity of kerosene and LPG consumed, The National Energy Outlook [14]; the prices of LPG, Jamaica National Energy Policy and Programme [ 1 l] and data provided by the Petroleum Corp of Jamaica; the price of kerosene and the CPI, Consumer Price Indices: Annual Review (various issues) [S]; average consumption of electricity, the number of customers and the price of electricity, Economic and Social Survey of Jamaica (various issues) [7]; and per capita income, National Income and Product (various issues) [15]. The CPI is used as the deflator of real per capita income and of all relative prices.
Results
on the significance of the coefficient of the lagged dependent variable. The rate of adjustment is 0.54 (1 - 0.46) for kerosene: this indicates a long-run price elasticity of -0.46 and income elasticity of 0.80. while the rate of adjustment for LPG is 0.45. indicating a long-run income elasticity of 1.22. Both rates of adjustment are rather modest. One could attribute the insignificant rate of adjustment in the demand for electricity to the increasing prices of imported fuel to price and income inelasticity of demand and the high cost of changing electricity-using appliances, eg refrigerators, electric stoves, lighting appliances, etc. Since the results indicate that the demand for LPG and for kerosene adjusted significantly during this period, an attempt was made to investigate what could be the contributory factors, particularly inter-fuel substitution. We regress separately per capita consumption of LPG and kerosene on the following independent variables - the real price of kerosene (PK), the real price of LPG (PG), the real price of electricity (PE), the real price of charcoal (PC), real per capita income (RY), and t (time period) to approximate any shift in demand. Our results (with t statistics in parentheses) are:
We do two sets of estimation. First, using Equation (l), we estimate the demand for kerosene and LPG; then, using Equation (l), but including the number of customers as another independent variable, we estimate the demand for electricity.4 The inclusion of this variable vastly improves the significance of our estimation. The results indicate that the price coefficient is significant for kerosene and for electricity; in both cases it is less than 1. This suggests price inelasticity. The real income coefficient is significant for all three energy types; they are also less than 1, suggesting income inelasticity. Overall, our results indicate that the demand for residential energy is both price and income inelastic, particularly in the case of the demand for electricity. The coefficient for the number of customers for the demand for electricity is significant at the 99% level. This result is consistent with Pindyck’s [ 181 contention that urban migration may also contribute to a rapid growth rate of household energy demand in developing countries.’ Jamaica has experienced rapid rural to urban migration over the last few decades and, like most LDCs, the availability of electricity is still concentrated in the few urban areas. In terms of long-term adjustment. significant results are obtained only for LPG and kerosene; this is based
*coefficient **coefficient ***coefficient
4For the residential demand for electricity, the dependent variable is the average kWh used per year. the independenr variables are: (i) the rate charged (cents/kWh) deflated by the Consumer Price Index, (ii) real per capita income. (iii) average number of residential customers, and (iv) the lagged value (1 year) of the dependent variable. Data on block-prices for electricity are not available. ‘Pindyck (1183, p 251).
For both LPG and kerosene. the coefficient for t is significant; however. the values are less than one. For LPG it is 0.408 and for kerosene 0.29. This indicates that there has been a slow increase in the demand for both LPG and kerosene; a plausible reason is the substitution of a cheaper source of energy. In both cases the respective price coefficient is not significant
226
In QI, = - 72.8 - 0.34 In P, + 5.46 In R Y (-0.56)
(2.49)*
-0.36lnP,+ (-0.28) R2 = 62
l.l6lnP,-0.18lnP,+0.29t (2.00)* ( - 0.118) F=
19
(2.27)*
DW = 2.3
LPG lnQ,=
-90.1
-0.29lnP,-O.l5lnP,+
1.7lnPc
( - 0.23)
(-0.212)
(1.89)***
- 0.35 In P, + 6.47 In R Y + 0.4081 ( - 0.203) R2 = 69
(2.7)* F = 26
is significant is significant is significant
ENERGY
(2.9)** DW = 2.3
at 95% confidence at 99% confidence at 90% confidence
ECONOMICS
level level level
July 1988
Residential
Table 4.
Regression results the demand for kerosene, LPG
demand,fk
energy
in Jamaica:
H. Ramcharran
and electricity.
Relative price
Real income
Number of customers
hYi!g~ dependent
R2
F
DW
0.43 (2.03)b
0.46 (5.12)
98.5
20.7
2.2
0.15 (0.8 1)
0.55 (2.27)b
0.55 (3.87)
75
9.3
1.96
- 0.0837 (-2.14)b
0.0762 (7.5)
- 0.0024 0.90)
99
159
2.19
Energy types
Constant
Kerosene
-3.23
-0.25 (-5.9)
LPG
- 5.05
Electricity
-0.529
1.25 (16.5)*
(-
Note: t statistics are in parentheses “Coefficient is significant at 99% confidence level. “Coefficient is significant at 95% confidence level.
and kerosene are used for cooking. substitution would have involved changes appliances.
although the expected sign is correct. The real income elasticity for both is significant and has increased significantly, the values indicating that the demand for both LPG and kerosene is highly income elastic. Any indication of inter-fuel substitution is indicated by the cross-price elasticity coefficient. Our results indicate that the coefficient for charcoal has the correct sign and is significant in both cases, at the 95% level for kerosene and at the 90% level for LPG; the respective values are slightly greater than one, 1.16 in the case of kerosene and 1.7 in the case of LPG. The cross-price elasticity coefficients of the other energy sources are not significant. The reasons could be explained with the help of the results presented in Table 5. It is important to note that cooking accounts for the largest portion of household energy demand. First, although the bulk of LPG and kerosene is used for cooking, the results of our model indicate no evidence of substitution; this could be attributed to the high cost of switching kerosene stoves with gas stoves and vice vet-w. Second, electricity is no substitute for either LPG or kerosene since only a small portion of electricity is used for cooking while most LPG
Table 5.
Conclusion In our study on the residential demand for energy our results show that (i) the demand for the main sources (electricity, LPG, and kerosene) is both price and income inelastic; (ii) consumers made some long-run adjustment in their demand for kerosene and LPG; and (iii) charcoal is a substitute for both kerosene and LPG. One of the objectives of the national energy plan is to encourage the use indigenous sources of energy. The prices of both LPG and kerosene were further increased by the removal of subsidies to encourage the use of charcoal. Our results indicate that the household sector has substituted charcoal for the more expensive LPG and kerosene. The effectiveness of this policy in the long run depends on the extent to which charcoal production is increased and distributed efficiently. In
1979 household survey energy sources and use.
Energy source
Electricity
End use
MBOE
Cooking Refrigeration Lighting Ironing
65.3 230.5 154.6
8.7 30.7 20.6
63.8 59.3 12.0
8.5 7.9 1.6
~ ~
Others’
165.2
22.0
~
Total
750.7
100.0
Water heating Air conditioning
Percentage of total
Kerosene %
50.9
MBOE
LPG %
MBOE
305.1 24.1 72.9
73.3 5.8 17.5
14.2
3.4
ECONOMICS
171.8 0.9
10.3
416.3
100.0
28.2
“Miscellaneous and unspecified household service. MBOE = million barrels of fuel oil equivalent. Source: Jamuica’s Nnrional Energy Policy and Progrummc,
ENERGY
Also, any in cooking
July 1988
183.0
Charcoal %
MBOE
93.9 0.05
72.2 ~~
5.6
12.4 ~
100.0
12.4
Ministry
84.6 5.7
of Mining
Fuelwood %
MBOE
85.3
34.9
14.7
6.0
Total % 85.3
_
loo.0
40.9
14.7
MBOE 643.4 256.8 227.2
% 43.6 17.4 15.4
-
98.9 69.3 11.8
6.7 4.7 0.8
-
168.2
11.4
1475.5
100.0
100.0
2.8
100
and Energy, 1983, Table 52, p 85.
227
Residential
demand,for
energy in Jamaica:
H. Ramcharran
terms of increasing charcoal production, the environmental consequences, among other costs, have to be considered.
Appendix The national energy plan incorporates previous initiatives. The main objectives
and builds upon of the plan are:
(9 to reduce
References 1
2
3
4
5 6
10
11 12
13
14 15 16
17 18 19
20 21
228
Julian Bharier, ‘Energy demand management’, in Energy Planning in Developing Countries, Oxford University Press, New York, 1984, pp 25-35. E. R. Brendt and D. Wood, ‘Technology, prices and the derived demand for energy’, The Review of Economics and Statistics, Vol 57, August 1975, pp 259-268. R. J. de Lucia and H. Jacoby, eds, Energy Planning for Developing Countries: A Study of Bangladesh, Johns Hopkins University Press, Baltimore, 1982. E. Cecelski, J. Dunkerley, and W. Ramsay, Household Energy and the Poor in the Third World, Resources for the Future, Washington, DC, 1979. Consumer Price Indices: Annual Review, Statistical Institute of Jamaica, Kingston, 1983. J. Dunkerley, W. Ramsay, L. Gordon and E. Cecelski, Energy Strategies for Developing Nations, Johns Hopkins University Press, Baltimore, 1981. Economic and Social Survey of Jamaica, National Planning Agency, Kingston, 1983. Energy Planning in Developing Countries, Oxford University Press, New York, 1984. M. A. Fuss, ‘The demand for energy in Canadian manufacturing’, Journalof Econometrics, Vol5, January 1977, pp 89-l 16. H. S. Houthakker, P. Vergler and P. Sheehan, ‘Dynamic demand analyses for gasoline and residential electricity’, American Journal of Agricultural Economics, Vol 56, May 1974, pp 412418. Jamaica ‘s National Energy Police and Programme, Ministry of Mining and Energy, Kingston, 1983. 0. E. G. Johnson, ‘Currency depreciation and export expansion’, Finance and Development, Vol 24, March 1987, pp 23-26. D. Jorgenson, ‘Consumer demand for energy’, in W. D. Nordhaus, ed, International Studies in the Demand for Energy, North Holland, New York, 1977, pp 309-328. The National Energy Outlook, Petroleum Corporation of Jamaica, Kingston, 1983. National Income and Product, Statistical Institute of Jamaica, Kingston, 1983. ‘The demand for energy: an W. D. Nordhaus, international perspective’, in W. D. Nordhaus, ed, International Studies in the Demand.for Energy, North Holland, New York, 1977, pp 239-285. W. D. Nordhaus, ed, InternationalStudies in the Demand for Energy, North Holland, New York, 1977. R. S. Pindyck, The Structure af World Energy Demand, MIT Press, Cambridge, MA, 1980. J. E. Samouilidis and C. S. Mitropoulos, ‘Energy and economic growth in developing countries: the case of Greece’, Energy Economics, Vol 6, July 1984, pp 191-202. ‘The sharp fall in commodity prices 1984-86’, Finance and Development, Vol 23, December 1986, p 45. Stanton Smith, ‘Energy supply management’, Energy Planning in Developing Countries, Oxford University Press, New York, 1984, pp 36-52.
dependency on imported energy and to diversify the present energy supply mix: (ii) to promote the efficient and effective utilization ofenergy while seeking to sustain economic growth; (iii) to accelerate exploration for and the development of indigenous energy supply sources: and (iv) to cushion the impact of continually increasing energy prices on the low-income groups of society while adopting pricing policies appropriate to achieving the above three objectives. The plan is divided into three phases: the short term (1981-85) the mid term (1985-90) and the long term (199&2000). Outlined below is a schedule of the plan.
The short term (i) Conservation in industrial and transport sectors. (ii) Implementation of slow speed diesel in the public utility system. (iii) Alternative energy projects such as the use of coal by the public utilities and specific industries. solar water heaters for domestic, commercial, and residential uses. (iv) The development of small and medium scale hydropower. (v) Research and development work on the use of alcohol in the transport sector from bio-mass sources.
The mid term (4 Energy conservation in transport and industry. (ii) The utilization of coal for electricity in specific industries and in the Jamaica Public Service Company (JPS Co) system. (iii) Ocean thermal energy conversion (OTEC) for electricity generation. (the Blue Mountain Multi(iv) Large scale hydro-power purpose Project). (v) Utilization of peat as a fuel for electricity generation. wastes (garbage and sewage) for power (vi) Urban generation, depending on viability of the collection system. (vii) Liquid fuels from vegetable oils. and application of appropriate (viii) Further development technology for utilizing biomass for energy production. (ix) Expansion of biogas applications in the rural areas for cooking gas, electricity, and refrigeration as well as in schools and small urban projects. of solar water heating programmes (x) The continuation and the development and utilization of solar thermal energy for power generation.
The long term (i) (ii) (iii) (iv) (v)
Ocean thermal energy conversion (OTEC). Solar ponds for electricity generation. High temperature (concentrating) solar collectors, Large wood-based electricity generation. Use of urban waste for electricity generation.
Source:
Economic and Social Survey of Jamaica, Planning Agency, 1981.
ENERGY
ECONOMICS
National
July
1988