Short- and long-run electricity demand elasticities at the subsectoral level: A cointegration analysis for German manufacturing industries

a r t i c l e i n f o JEL classification: C1 Q4 Keywords: Electricity demand elasticity Disaggregated data Cointegration Granger causality Structural break German industry We estimate electricity demand elasticities for eight subsectors of the German manufacturing industry using annual data from EU-KLEMS and the International Energy Agency for 1970–2007. The subsectoral approach allows to retain additional information otherwise blurred by aggregation and to benefit from lower intra-sectoral heterogeneity. By employing a cointegrated VAR approach and accounting for structural breaks, we find long-run relationships for five of the eight subsectors studied. Short-run elasticities are estimated using single-equation error correction modeling. Granger causality tests and an impulse response analysis provide further insights into the relationships and dynamics of the variables, confirming the usefulness of the subsectoral approach adopted. Energy demand modeling on the basis of historical time series data has traditionally been conducted for a specific country, at an aggregated or dis-aggregated level, in two dimensions. One dimension concerns the type of energy (i.e., mainly electricity, natural gas or gasoline), while the other dimension concerns different types of major end-use sectors: industry, commerce and public services, households and transportation. At one extreme, there is the analysis on the basis of data aggregated over all energy carriers and sectors (i.e., at the economy-wide level), whereas at the other extreme there is the analysis for only one energy carrier for one sector. Analyzing data aggregated over widely heterogeneous sectors will most likely result in crude inference concerning economic relationships and consumer behavior. In this respect, we share the view of Pesaran et al. (1998, p.46) that it is important for a valid econometric demand analysis to be aimed at " …as homogenous a grouping of consumers as is feasible. " This implies that studies on energy demand should use data at the lowest level of aggre-gation possible. 1,2 To this end, our aim in the present study is to reap the benefits of additional information otherwise blurred through aggregation by analyzing subsectoral demand functions for a single energy carrier (electricity). To the best of our knowledge, this is the first study that makes use of disaggregated data at a subsectoral industry level for estimating energy demand elasticities with regard to economic activity and energy price within a standard cointegration framework. Specifically, the elasticities are estimated for each of the following eight subsectors of the German economy 3 : [FT] food …