Modeling & Forecasting US
Electricity Consumption
Prepared for 30th USAEE North American
Conference, Washington DC
By
Mark Hutson, PhD Candidate & Prof. Fred Joutz
Department of Economics
George Washington University
Objectives
• Simultaneously model Sector Electricity Consumption and
Macroeconomic Activity
• Analyze feedbacks between the electricity market and the
economy using monthly data
• Sample period is January 1987 through December 2010
• Attempt to find a congruent model with long-run relationship
and short-run dynamics
• Simultaneously model Residential, Commercial, and Industrial
Electricity Demand with the Macroeconomy
• The determinants of consumption considered are real
electricity prices, real prices of substitute, real macroeconomic
variable relevant for each sector, cooling degree days and
heating degree days.
Summary of Results
• We find a model which is congruent (white noise residuals, stable,
consistent with economic intuition, explains previous results)
• We find a LR relationship in each sector of the electricity market
– Residential Consumption elasticity is positive with income and
negative with own-price
– Commercial Consumption elasticity is positive with the commercial
natural gas price, commercial employment, commercial hours worked,
and a slight upward trend, and has a negative own-price elasticity
– Industrial Consumption elasticity is positive with two substitute fuel
prices (residual fuel oil, NG) and real manufacturing output, and
negative with own-price
• We find additional error correction terms in retail sales, income, and service
sector employment
• We successfully model three electricity sectors and the Macroeconomy
simultaneously using 18 endogenous variables, 28 identities, and 6 errorcorrection terms
Model Selection
• The Model was built using the following
process:
– Base Sectoral Model Specification
– Autometrics down-selection of variables
– Identification of the LR Error-Correction Terms
– Integration into a single model
Base Sector Model Specification
• Models of Sectoral Electricity were initially specified as
dynamic single-equation relationships
• The left-hand side variable is the change in electricity
demand in each case
• Each differenced variable included in the model was
introduced with lags of 1-, 2-, 3-, and 12-months
• Additionally, where applicable, contemporaneous
determinants of demand were included
– Macroeconomic variables
– Weather (contemporaneous, 1-, and 12-months only)
Base Sector Model Specification (continued)
• Long-Run relationships also entered the base
model through the levels of these variables:
– All long-run variables were included
contemporaneously (where appropriate), and at
1- and 12-month lags
– Additionally, a budget share variable (measuring
nominal expenditure on electricity relative to
income) was included at the 0-, 1-, and 12-month
lag (Deaton & Muellbauer, 1980)
Autometrics –
General to specific modeling algorithm
Hendry and Krollzig (2001): There are five basic steps:
1. Specification of the GUM (General Unrestricted Model) by the
empirical modeler.
2. Tests for mis-specification usually through residual diagnostics.
3. Begin Model Reduction Process. Investigation of possible paths for
variable selection. Elimination of “irrelevant” variables.*
4. Test terminal models or paths for congruency.
5. Evaluate terminal models for final model(s) through encompassing
tests.
*Note that Impulse Saturation was used, which adds and potentially
relevant impulse variables to improve fit and stability of parameter
estimates
End Result: Retain only Variables in GUM that Matter!!
7
The Modeled Variables
Electricity
Demand
Residential Electricity Demand
Energy
Variables
Macro
Variables
Sectoral Electricity Prices:
Disposable Personal Income
- Residential
-Commercial
- Private Service Sector Employment
- Industrial
-Hours of Private Service
Sector Employees
-Retail Sales
Commercial Electricity Demand
- Industrial Production – Manufacturing
Electricity Substitute Prices:
- Residual Fuel
Industrial Electricity Demand
- Sectoral Natural Gas
- Distillate Fuel
- Total Capacity Utilization
- Manufacturing Employment
- Personal Consumption
Expenditures Price Deflator (2005)
- Producer Price Index – All
Commodities (2005)
Variables Down-Selected from the Model
Using General to Specific Approach
Residential
Commercial
Industrial
- Personal
Consumption
Expenditures
- Wages of Private
Service Sector
Employees
- Total Industrial
Production
(rather than
Manufacturing)
- Electricity Budget
Share (Percent of
Income Spent on
Electricity)
- Employment to
Population Ratio
- Electricity Budget
Share (Percent of
Income Spent on
Electricity)
- Producer Price Index
– Finished Goods &
Services (Alternative
Price Deflator)
- Manufacturing
Wage
- Manufacturing
Weekly Hours
Identification of Error-Correction Terms
• The reduced models contained RHS variables
in differences and levels
• Variables in the levels at 1-month lag were
considered for the error correction term
• A well-specified error-correction term was
identified in each electricity sector model and
in three economic sectors
Residential Electricity Demand Equation
Short-Run Variables
Variable
Lags
Agg Sign
Change in Electricity Demanded
1, 12
+
Level of Electricity Demanded
12
+
Heating Degree-Days
0, 1, 12
+
Deviations from Normalized Heating Degree-Days
1, 12
-
Cooling Degree-Days
0, 12
+
Deviations from Normalized Cooling Degree-Days
0, 1, 12
+
Change in Real Electricity Price
1
-
Impulse & Seasonal Variables Added
Constant
-
Impulse Variables
January, 1990; September, 1990; June, 1992
Centered Seasonals
February, April, May, June, September
Residential Electricity Demand Equation
Error Correction Term – All in Natural Logarithms
Variable
Sign
Elasticity
Electricity Demand
+
1
Real Disposable Income
+
0.4
Real Electricity Price
-
0.1
Commercial Electricity Demand Equation
Short-Run Variables
Variable
Lags
Agg Sign
Change in Real Retail Sales
3
+
Change in Private Service Employment
2
+
Level of Private Service Employment
12
+
Heating Degree-Days
1
+
Deviations from Normalized Heating Degree-Days
1
-
Cooling Degree-Days
1
+
Level of Real Electricity
2
+
Impulse & Seasonal Variables Added
Constant, Trend
-
Impulse Variables
July, 1996
Centered Seasonals
February, June, July, August, September
Commercial Electricity Demand Equation
Long-Run Variables – All in Natural Logarithms
Variable
Sign
Elasticity
Electricity Demand
+
1
Real Electricity Price
-
.085
Real Natural Gas Price
+
.040
Hours of Private Service Sector Employees
+
.676
Private Service Sector Employment
+
.918
Trend
+
.00067
Industrial Electricity Demand Equation
Short-Run Variables (In LN unless noted with *)
Variable
Lags
Agg Sign
Change in Electricity Demand
1, 2
+
Level of Electricity Demand
12
+
Change in Distillate Price
2
+
Change in Capacity Utilization*
0
-
Cooling Degree-Days
1
+
Deviations from Normalized Cooling Degree-Days
1
-
Change in Industrial Production (Manufacturing)
0, 1
+
Change in Manufacturing Employment
0
+
Impulse & Seasonal Variables Added
Constant
-
Impulse Variables
Dec ‘98, Jan ‘99, Feb ‘00, Jul ‘00, Jul ‘07, Feb ’04, Feb ‘08, Jun ‘09
C. Seasonals
Jan, Feb, Mar, Apr, May, Jun, Jul, Nov
Industrial Electricity Demand Equation
Long-Run Variables – All in Natural Logarithms
Variable
Sign
Elasticity
Electricity Demand
+
1
Real Electricity Price
-
.125
Real Price of Residual Fuel Oil
+
.037
Real Price of Natural Gas
-
.044
Industrial Production Index (Manufacturing Only)
+
.192
The Macro Error-Correction Terms
Income Error-Correction Term
Variable
Sign
Elasticity
Real Disposable Income
+
1
Hours of Private Service Employees
-
9.440
Constant
+
24.026
Trend
-
.0025
The Macro Error-Correction Terms
Private Service Sector Employees Error-Correction Term
Variable
Sign
Elasticity
Private Service Sector Employment
+
1
Real Retail Sales
+
.577
Constant
+
4.112
Real Retail Sales Error-Correction Term
Variable
Sign
Elasticity
Real Retail Sales
+
1
Private Service Sector Employment
+
1.835
Constant
-
8.130
Trend
-
0.0006
Example of Forecasts
Example of Forecasts
Example of Forecasts
Example of Forecasts
Example of Forecasts
Example of Forecasts
Example of Forecasts
Feedbacks Captured
- Electricity Demand
- Electricity Prices
- Natural Gas Prices
- Residual Fuel Oil Prices
Electricity
Markets
Real
Economy
- Real Disposable Income
- Private Service Sector
Employment
- Hours of Private Service
Employees
-Real Retail Sale
Next Steps
• Further testing of forecasting Capabilities
• Expanding the macro-modeling capabilities of
the model
• Further refine the substitute equation models
The Electricity Error Correction Terms
The Economic Error Correction Terms