Bottom-Up Analysis of Energy Demand

Traditionally, energy economics has dealt with energy supply rather than demand. In contrast, this book gives demand precedence over supply, in keeping with the rule that without a minimum demand, supply does not come forth. Energy demand is often discussed in relation to the question of how to achieve ‘energy savings’, a term devoid of meaning without some prior knowledge of the factors affecting energy demand. These factors importantly derive from the profit-seeking actions of business managers and utility-oriented actions of consumers. Over the years, two fundamentally different analytical approaches to the demand for energy have emerged: macroeconomic modeling (often called the top-down approach) and microeconomic process analysis (the bottom-up approach). The latter, to be expounded below, is based on the premise that energy demand is determined by the existing stock of energy-using capital, the intensity of its use, and its energy efficiency. This approach gives rise to a series of questions: Why is it important to distinguish between energy-using capital and the intensity of its use for analyzing energy demand? What are the factors determining the acquisition of a particular energy-using capital good? What are the factors determining the intensity of their use? In addition, the issue of energy efficiency needs to be addressed: Why is energy ‘wasted’ if it is a costly factor of production? How can efficiency be improved? Is there market failure in the case of investment in energy efficiency? How can innovation boost energy efficiency? How is energy efficiency defined to begin with?