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