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ECONOMIC REGULATORS CONFERENCENERSA & TIPSAUGUST 2012

The sensitivity of the South African industrial sector’s electricity consumption

to electricity price fluctuations

Dr Roula Inglesi-Lotz

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Structure of presentation

• Introduction• Motivation• Purpose• Methodology• Data• Results• Conclusion

Introduction

• In South Africa, choosing the correct and appropriate electricity price regime has been an issue for discussion during the last decade.

• Imperative for the policy makers to be able to understand and in a way, “predict” the reactions of consumers to price changes.

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Introduction (2)

• Different price structures as well as different electricity profiles are the main reasons why different economic sectors should be examined separately and treated accordingly.

• The South African industrial sector is responsible for an average of approximately 58% of the total electricity consumption, making this sector one of the most important ones from an energy consumption point of view.

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Motivation

• Inglesi-Lotz and Blignaut (2011) found out that among various economic sectors such as agriculture and transport, the industrial sector was the only one whose electricity consumption behaviour was found sensitive to price fluctuations on average during the period 1993 to 2006.

• Inglesi-Lotz (2011) found out that the sensitivity of electricity consumption to price fluctuations changes over time by using the Kalman filter econometric methodology for the period 1970 to 2007

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Purpose

• This paper proposes that the sensitivity of the industrial sector’s electricity consumption to price fluctuations (price elasticity) has been changing through the years.

• The purpose of this paper is to estimate the time-varying sensitivity of the industrial sector’s electricity consumption to price changes by using the Kalman filter econometric methodology for the period 1970 to 2007.

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LiteratureAuthors Year Country/region Sector Price elasticity

Pindcyck 1979 Group of countriesIndustrial & Commercial

-0.07 to -0.16

Lynk 1989 UK Industrial -0.69Caloghirou et al. 1997 Greece Industrial -0.90Beenstock et al. 1999 Israel Industrial 0.123

Hunt et al. 2003 UK Manufacturing -0.20Kamerchen, Porter 2004 Oman Industrial -0.34 to -0.55Dimitropoulos et al. 2005 UK Manufacturing -0.159

Roy et al. 2006 Country panel Industrial -0.80 to -1.76

Enevoldsen et al. 2007Denmark, Norway and

SwedenIndustrial -0.35 to -0.44

Agnolucci 2007 UK Industrial -0.60Agnolucci 2009 UK and Germany Industrial -0.64

Inglesi-Lotz and Blignaut

2011 South Africa Industrial -0.869

He et al. 2011 ChinaIndustrial & Commercial

-0.018

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Literature (2)

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• South Africa (Industrial sector)– Inglesi-Lotz and Blignaut (2011): Estimating the

price elasticity of demand for electricity by sector in South Africa.

– Ziramba (2009): Disaggregate energy consumption and industrial production in South Africa.

– Inglesi-Lotz and Blignaut (2011): South Africa’s electricity consumption: A sectoral decomposition analysis

Methodology

1. Hansen test for stability of parameters

Testing whether the coefficients are statistically varying over time or not.

2. Kalman filter estimation

Estimating the equation with the assumption of time-varying coefficients (from Hansen test).

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𝑙𝑐𝑜𝑛𝑠=𝑎0+𝑎1 𝑙𝑝+𝑎2𝑙𝑦+𝑎3𝑙𝑛+𝜀𝑡

Data

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1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

-

5.00

10.00

15.00

20.00

25.00

30.00

p

c/kW

h

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

-

200,000,000,000,000

400,000,000,000,000

600,000,000,000,000

800,000,000,000,000

1,000,000,000,000,000

1,200,000,000,000,000

1,400,000,000,000,000

1,600,000,000,000,000

y

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

-

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

n

1970

1974

1978

1982

1986

1990

1994

1998

2002

2006

-

20,000,000,000

40,000,000,000

60,000,000,000

80,000,000,000

100,000,000,000

120,000,000,000

cons

MW

h

Data (2)

Variable Source Units

Industrial electricity consumption (cons)

National Energy council and Energy Balances (DoE)

kWh

Average electricity price for the industry (p)

Energy price report (DoE) c/kWh

Real output of the industrial sector (y)

Quantec Constant 2005 prices

ZAR

Employment of the industrial sector (n)

Quantec number

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Results

  Lc statistic

p-value Conclusion 

ly, ln 0.192 >0.2 The null hypothesis (H0: parameter

stability) cannot be rejected the parameters are constant

Lp 0.400 0.077 The null hypothesis (H0: parameter

stability) can be rejected the parameter is not constant

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Hansen test results

Results (2)

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Kalman filter results

SSpace model    

Sample 1976-2007

Included observations 32

Number of iterations to convergence 9

     

Variables Estimated coefficients p-values

c(1) (output coefficient) 0.690 0.000

c(2) (employment coefficient) 0.252 0.061

c(3) -4.065 0.000

  Final state p-values

sv1 (price coefficient) -0.952 0.000

Results (3)

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Kalman filter results19

77

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

0

5

10

15

20

25

30

-1.15

-1.10

-1.05

-1.00

-0.95

-0.90

-0.85

electricity price price elasticity

c/kW

h

Conclusion

• The findings of the exercise show that indeed price sensitivity changed since the 1970s: it has decreased in absolute values from -1 in 1980 to -0.953 in 1990.

• Since then, the elasticity stabilised around -0.95 showing that the industrial sector has experienced an inelastic demand. In other words, the behaviour of the industrial consumers did not vary significantly in the 2000s.

• Sensitivity of consumers to price fluctuations becomes smaller in absolute terms while the real prices of electricity declined over the last half of the sample examined.

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Conclusion (2)

• As the prices increase, probably reaching the levels of the 1970s or even before, the industrial sector’s behaviour might change and the elasticity might end up at levels higher than one (elastic).

• Although, the price elasticity of electricity consumption is high, the historically low level of electricity prices was a factor for the unchanged sensitivity of the industrial sector in the last decade.

• This low level of prices is indicative made the electricity costs of the economy to contribute little in the total cost of operation of all the economic sectors.

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Thank you for your time and attention

Dr Roula Inglesi-Lotz

roula.inglesi-lotz@up.ac.za

Department of Economics

University of Pretoria20