Professor Kim Swales from Strathclyde University tells me about provisional results from their recent work:
We have undertaken econometric work on the elasticity of demand for household energy in the UK. We get values of around 0.4 for the short run and over 1 for the long-run.
What does this mean and why is it important?
What does an elasticity of demand of 1.0 for energy mean?
It means that if the price of energy is doubled its use is cut by half. Raising the price of energy by 33% should cover an “energy gap” of 25%.
What are the policy implications?
Energy security – “Keeping the lights on”
Energy security is an important concern of the UK Government. Drastic action must be taken to fill the “energy gap” or the “lights will go out”. An elasticity of demand of about 1.0 shows this to be a nonsense. If I switch my lights to be OLEDs (Organic Light Emitting Diodes), I can have more light for electricity which is twice the price and at the same time use much less electricity. At present the cost of electricity to keep my household lights on is so small I may not bother – nor might you. Good as they are the following claim from an OLED manufacturer is incorrect:
Lighting in buildings accounts for a sixth of total electricity use in the UK. The LOMOX OLED technology promises to be 2.5 times more efficient than standard energy saving bulbs. It has been estimated that, by replacing current lighting technologies, it could reduce annual global CO2 emissions by over 2,500,000 tonnes by 2020 and nearly 7,400,000 by 2050, equivalent to a quarter of the annual carbon emissions of Wales (or the annual emissions of Birmingham).
That is unless “replacing current lighting technologies” is constrained to mean “replacing current lighting technologies with the same level of light” but if the elasticity of demand is greater than zero households will increase their consumption of artificial light. If the elasticity is 1.0 or more they will blow away any energy saving. I fancy the walls of light promised by OLED wallpaper.
Electricity consumption by lighting in the UK is split between the commercial (70%), residential (26%) and street lighting (4%) sector.
But do office occupiers have much incentive to cut electricity use? For a 200 square feet office:
$ 124.8[£82] is the direct cost of lighting the office every year. LED based devices can do the same job for 1/7th of the cost of incandescent lights. The cost of lighting with these energy efficient lights would go down to just $17 – a saving of $107 [£66].
That’s about £4 per square metre per year. Office rental values in most of the UK mostly exceed £100 per square metre per year. It can safely be said that lighting costs (even using incandescent lighting) accounts for less than 5% of office costs.
Office space required for one employee may be 5 square metres per employee. Value added per employee is likely to be more than £50,000 per year so employee value added per square metre is £10,000 per square metre per year so lighting costs are probably less than 0.05% of value added.
Lighting is not a board level consideration – unless it is thought that employee productivity can be improved by better lighting, which may be the case. At current prices the energy cost of lighting to business is trivial.
The slogan “keep the lights on” is a joke but what it hides is not very funny.
Of course, energy is used for things other than lighting but if the elasticity of the demand for energy is anything near Professor Swales’ provisional estimates, the energy gap can be easily filled by an increase in price.
Tax on carbon is a good option for increasing the price and the revenue can be used to create jobs as I noted in the previous post, Tax carbon and subsidise jobs.
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