Residential Consumption of Gas and Electricity in the US : What are the Effects of Prices and Energy - Efficiency

We focus on residential electricity and gas demand, and ask three research questions. First, how does residential energy use respond to prices? We specifically wish to examine whether ownand cross-price elasticities have changed in recent years, given the evolution of the energy market. Second, is such responsiveness sensitive to equipment and energy choices that are not easily reversed (e.g., using gas or electricity for heating or cooling), and income? Third, what is the impact of energy efficiency investments and retrofits on energy consumption? When we examine the latter question, we focus attention on homeowners, since the majority of the state and federal incentives to energy efficiency and conservation are offered to homeowners. We answer these questions using a large and comprehensive dataset obtained by merging observations on dwellings from six nationwide waves of the American Housing Survey (1997, 1999, 2001, 2003, 2005 and 2007), plus three waves from the metro waves of the American Housing Survey (2002, 2004 and 2007), with electricity and gas prices, local weather data, state policies and demand-side management activities of the utilities. Briefly, we find that electricity use is responsive to the price of electricity (with an elasticity that ranges from -0.66 to -0.95) and increases with the price of gas. The demand for gas is only slightly less responsive, with elasticities ranging from -0.552 to -0.693. Our dynamic models produce short-run own-price elasticities equal to -0.808 and -0.479 for electricity and gas, respectively. Their long-run counterparts are -0.944 and -0.523, respectively. We find mixed evidence about energy efficiency investments and retrofits, which sometimes appear to increase, rather than decrease, energy use. The largest effect is of the order of a 2% increase. Were these results confirmed by other studies, they might raise doubts about the appropriateness of focusing on energy efficiency in residential consumption. JEL Classification: D, D2, Q4, Q41, Q48.