U.S. Energy Information Administration logo

Analysis & Projections

Price Elasticities for Energy Use in Buildings of the United States

Release date: October 22, 2014

Introduction

Energy demand tends to be responsive to changes in energy prices, a concept in economics known as price elasticity. Generally, an increase in a fuel price causes users to use less of that fuel or switch to a different fuel. The extent to which each of these changes takes place is of high importance to stakeholders in the energy sector and especially in energy planning. The purpose of this analysis is to determine fuel-price elasticities in stationary structures, particularly in the residential and commercial sectors.

The Residential Demand Module (RDM) and Commercial Demand Module (CDM) are two modules within the National Energy Modeling System (NEMS) at the U.S. Energy Information Administration (EIA). The RDM and CDM are used by EIA to model energy use in the residential and commercial sectors. They are updated and maintained separately, but also have shared characteristics and functions due to similarities between them. Due to these similarities, EIA sometimes uses the term "buildings sector" or "buildings sectors" to refer to the residential and commercial demand sectors in tandem. The following analysis starts with the buildings modules as they exist in the Reference case of the 2014 Annual Energy Outlook (AEO2014) and then simulates different price paths for fuels out to 2040. Only the buildings modules are used in these simulations; integrated effects with the rest of NEMS are not included.1 The resulting changes in energy demand are analyzed and used to calculate fuel-price elasticities.

The modules allow for both short-run and long-run responses by consumers in the buildings sectors.2 Short-run responses are more behavioral and temporary in nature. An example of a short-run response would be a building occupant turning down their thermostat during cold weather in response to high energy bills. This action reduces energy demand for heating. A long-run response would be installing a more-efficient heating system or upgrading windows and insulation in a building. These long-run responses involve more durable changes and usually take place over a longer time horizon as technology and market development change building shells and the appliances and equipment that go into buildings.

This analysis presents the following simulations:3

  • Reference case: fuel prices remain untouched; results from buildings modules are as they appear in AEO2014, without additional effects from other modules of NEMS.
  • Electricity Price Doubled case: just the electricity price doubled between 2015 and 2040.
  • Natural Gas Price Doubled case: just the natural gas price doubled between 2015 and 2040.
  • Distillate Price Doubled case: just the distillate fuel oil price doubled between 2015 and 2040.
  • Permanent All Fuel Prices Doubled case: prices for all three fuels (electricity, natural gas, and distillate fuel oil) doubled between 2015 and 2040.
  • Temporary All Fuel Prices Doubled case: prices for all three fuels (electricity, natural gas, and distillate fuel oil) doubled, but for a temporary period between 2020 and 2025.
Delivered energy in the commercial sector

Footnotes

1 NEMS is an integrated, modular system where fuel prices and energy demand interact until an equilibrium is met for the entire system for each model year. In the buildings modules of NEMS, energy demand equilibrates to fuel prices from other modules. Though year-to-year changes in fuel price have their largest effect on energy demand in the year in which they occur, the full effect of fuel price change is also spread over the following two years in order to prevent unrealistic demand responses to price spikes of one year or other short-term duration. This is why Tables 1 and 2 present elasticity results for Years 1-3, where Year 1 in the model is when the simulated price change from Reference case was programmed to take place and Year 2 and Year 3 are the two following years (Year 1 corresponds to 2015 in the model).

2 In economics, the short run is generally defined as a period over which capital stock remains fixed. But, because the typical service lifetime of installed capital can vary among economic sectors, energy end uses and equipment types, there is no single definition that differentiates between short and long run.

3 Elasticity calculations are done by taking energy demand projections in the three cases where a single fuel price is doubled and comparing that to the projected energy demand in the Reference case.

    See complete report.