Households Energy Demand And Energy Use Pattern In Urban Ethiopia

Households’ Energy Demand and Energy use Pattern in Urban Ethiopia

By:

Mekonnin Bersisa Gadisa

Addis Ababa University School of Graduate Studies Addis Ababa, Ethiopia

Abstract This study is aimed at examining households’ energy demand and energy use patterns in urban Ethiopia. The energy use pattern of the country indicates predominance of traditional energy which has implications for environment, sustainability and human health. Indoor air pollution, deforestation, climate change and loss of soil fertility are some of the social, economic and environmental impacts of biomass energy use. Such energy use pattern is to a large extent the characteristic of less developed countries in general and Ethiopia in particular. This puts under question the development efforts of the nation and thus urges for immediate policy measures to ameliorate the situation. We estimated energy demand in urban Ethiopia using an Almost Ideal Demand Model and secondary data from Central Statistical Agency of Ethiopia. The model was estimated as a system of demand and the estimates were constrained to comply with neoclassical theoretical restrictions on demand. The study indicated that at regional level there is immense disparity in energy use patters. While the estimated expenditure elasticities of demand show all fuel types are necessities for urban households in Ethiopia, demand for almost all fuel types was found to be price inelastic. Fuelwood and electricity were found to be substitutes and highly responsive to own price. Similarly charcoal and kerosene were found to be substitutes. The study concluded that any planning at the country level associated with energy use should take variation across regions into account. Further the study indicated the existence of a room of intervention. To change the energy use pattern policy makers can make use of the estimated elasticities and especially manipulate price of modern energy sources (kerosene and electricity). Further the study contributes in the area of empirical energy demand analysis.

Key words: Almost Ideal Demand System, energy demand, expenditure elasticity, price elasticity, traditional and modern energy, urban Ethiopia

Table of contents Pages Acknowledgement----------------------------------------------------------------------------i Acronym -------------------------------------------------------------------------------------- v List of tables ------------------------------------------------------------------------------- vii List of figures ----------------------------------------------------------------------------- viii Abstract ------------------------------------------------------------------------------------- ix Chapter one --------------------------------------------------------------------------------- 1 1. Introduction ------------------------------------------------------------------------------- 1 1.1. Background ----------------------------------------------------------------------------- 1 1.2. Statement of the problem ------------------------------------------------------------- 5 1.3. Objective of the study ----------------------------------------------------------------- 8 1.4. Justification and significance of the study ----------------------------------------- 9 1.5. Scope of the study ------------------------------------------------------------------- 10 1.6. Limitation of the study -------------------------------------------------------------- 11 Chapter two ------------------------------------------------------------------------------- 12 2. Literature review------------------------------------------------------------------------ 12 2.1. Theoretical literatures---------------------------------------------------------------- 12 2.1.1. Consumers behavior and demand functions ----------------------------------- 12 2.1.1.1. Utility maximization and demand function ---------------------------------- 13 2.1.1.2. Cost minimization and demand functions------------------------------------ 15 2.1.1.3. Indirect utility function, expenditure function and demand equations --- 17

2.1.2. Demand system specifications --------------------------------------------------- 20 2.2. Empirical energy demand estimation---------------------------------------------- 23 Chapter three ---------------------------------------------------------------------------- 32 3. Methodology and data description -------------------------------------------------- 32 3.1. Methodology -------------------------------------------------------------------------- 32 3.1.1. Model specification---------------------------------------------------------------- 32 3.1.2. Model estimation ----------------------------------------------------------------- 39 3.2. Data description ---------------------------------------------------------------------- 42

Chapter Four --------------------------------------------------------------- 45 4. Descriptive statistics and analysis of empirical results---------------------------- 45 4.1. Descriptive statistics ----------------------------------------------------------------- 45 4.2. Analysis and presentation of empirical results----------------------------------- 49 4.2.1. Estimation of first stage budgeting ---------------------------------------------- 49 4.2.2. Estimation of second stage budgeting------------------------------------------- 51 4.2.3. Elasticity of demand --------------------------------------------------------------- 57 4.2.3.1. Expenditure elasticity of demand --------------------------------------------- 58 4.2.3.2. Own-price and cross-price elasticities of demand -------------------------- 59

Chapter Five ---------------------------------------------------------------- 61 5. Conclusions and policy implications ------------------------------------------------ 61 5.1. Conclusions -------------------------------------------------------------------------- 61 5.2. Policy implications ------------------------------------------------------------------ 63 Bibliography------------------------------------------------------------------------------- 65

Appendices--------------------------------------------------------------------------------- 69 1. Econometric estimations----------------------------------------------------------- 69 2. Computation of elasticities -------------------------------------------------------- 71 3. Descriptive statistics by region --------------------------------------------------- 73