Residential energy demand for space heating in the Nordic countries: Accounting for interfuel substitution

Reliable estimation of fuel consumption in residential sector is crucial for the future development of fuel supply system. Three approaches are compared in this study to capture climate impact, as well as and interfuel substitution between fuels, on residential fuel consumption for space heating in the Nordic countries. The first approach aims at directly estimating the demand for each energy carrier as a function of explanatory variables including heating degree days, fuels price and GDP per capita. The second approach is a two stage model combing an econometric model for total energy use for space heating, and the market share for energy carriers based on cross/price elasticities, while in the third approach a set of simultaneous equations models were estimated. Based on the results of the mean average error and root-mean-square error criteria for three approaches across the Nordic countries, it was found that the second and third approaches were able to capture the complementary and substitution effects between fuels. This finding confirms our hypothesis that the interfuel substitution is a key factor for estimating changes in fuel demand and should be accounted for when residential energy demand is projected. The results additionally have important implications for climate change policy, by exploring the impact of fuel price on residential energy demand for space heating. (C) 2015 Elsevier Ltd. All rights reserved.