ARTICLE IN PRESS

Energy Policy 33 (2005) 2350–2360

www.elsevier.com/locate/enpol

Climate-related electricity demand-side management in oil-exporting

countries—the case of the United Arab Emirates
Mahmoud A. Al-Iriani
Department of Economics, College of Business and Economics, United Arab Emirates University, Al-Ain, United Arab Emirates
Available online 3 July 2004

Abstract

The oil crisis of the 1970s has increased the concern about the continuity of oil imports flow to major oil-importing developed
countries. Numerous policy measures including electricity demand-side management (DSM) programs have been adopted in such
countries. These measures aim at reducing the growing need for electricity power that increases the dependency on imported foreign
oil and damages the environment. On the other hand, the perception that energy can be obtained at very low cost in oil-rich
countries led to less attention being paid to the potential of DSM policies in these countries. This paper discusses such potential
using the case of the United Arab Emirates (UAE). Since air conditioning is a major source of electric energy consumption, the
relationship between climate conditions and electric energy consumption is considered. An electricity demand model is constructed
using time series techniques. The fitted model seems to represent these relationships rather well. Forecasts for electricity
consumption using the estimated model indicate that a small reduction in cooling degrees requirement might induce a significant
reduction in electric energy demand. Hence, a DSM program is proposed with policy actions to include, among others, measures to
reduce cooling degrees requirement.
r 2004 Elsevier Ltd. All rights reserved.

Keywords: UAE; Electricity consumption; Demand-side management; Dynamic regression; Energy conservation

1. Introduction The aim of this paper is to explore possible policies

Electricity conservation has been in the core of
attention for the last three decades in many energy-
importing countries. In energy exporting countries, lack
of energy conservation efforts seems to be the result of
the perception that in those countries with abundant oil
resources there is no need for such efforts since energy
can be obtained at relatively low cost. As one of the oil-
exporting countries, UAE’s energy sector, especially
electric energy, has gone through major developments
since the establishment of the state in 1971. UAE has
been successful in meeting its rapidly growing needs for
electric power by increasing the country’s generation
capacity. However, satisfying the growing demand of
electricity this way requires costly investments.
Tel: +971-3-750-1219; fax: +971-3-763-2383.
E-mail address: maliriani@uaeu.ac.ae (M.A. Al-Iriani).
that may enhance efficiency in the power sector of the
UAE. While supply side policies are important, our
discussion concentrates on the demand-side policies to
electricity conservation. In particular, viable policies
that might reduce the rate of electricity consumption
growth, and the need for added generation capacity to
meet peak demands will be discussed. Increased energy
use efficiency is believed to be a key component in
electricity demand management. End-use efficiency is
still at minimum levels in the UAE.
The rest of this paper is organized as follows: Section
2 introduces some information about the electricity
sector in the UAE. Section 3 defines electricity demand-
side management (DSM) programs and some of their
components. Section 4 outlines the estimation and
forecasting procedures of electricity demand in the
UAE, and their results. Finally, Sections 5 and 6 present
a proposed DSM program, and conclusion, respectively.

0301-4215/$ - see front matter r 2004 Elsevier Ltd. All rights reserved.
doi:10.1016/j.enpol.2004.04.026
 ARTICLE IN PRESS
M.A. Al-Iriani / Energy Policy 33 (2005) 2350–2360 2351

2. Electricity Sector in the UAE 40

35
The UAE is a federation of seven Gulf Emirates
30
including Abu Dhabi, Dubai, Sharjah, Ajman, Ra‘s Al-
Khaimah , Fujairah, and Umm Al-Qaiwain. To 25

Billion kWh
appreciate the crucial role that the electricity sector 20
plays in the economy of the UAE, it is essential to
15
explore key characteristics of the UAE economy. The
UAE is a major oil producing and exporting country. It 10

has nearly 98 billion barrels of proven oil reserves, 5

amounting to about 10% of world total reserves, and
5.8 trillion m3 of proven natural gas reserves, 4.6% of 0
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000
world’s total. Oil production capacity is estimated at 2.6
million barrels daily.1 Fig. 1. Growth of electricity consumption in the UAE.
The country has benefited from the sharp increase in
oil prices that started in the early 1970s. With domestic
consumption of less than 350 000 barrels daily, the 12000

country was able to generate significant amounts of 10000

revenues from its oil exports. Estimates for oil revenues 8000
reached $20.7 billion in the year 2000. Combined with a
kWh
6000
relatively small population (less than 3 million), this
4000
allowed the UAE to enjoy a rapid economic growth,
making per capita GDP one of the highest in the world. 2000

Despite sharp fluctuations in oil prices, UAE has 0 World

OECD

Middle East

UAE

E. Europe

China

Asia

Latin America

Africa
managed to preserve an acceptable rate of economic
growth by successfully diversifying its economy away
from a complete dependence on oil revenues. Recently,
oil’s share in GDP is estimated at less than 30%.
Fig. 2. Per capita electricity consumption in the UAE and selected
world regions.
2.1. Electricity consumption

The rapid growth of the UAE economy has been

summer hot season and a trough demand in the winter
accompanied by a remarkable increase in energy
cool season. The latter is due to varying air conditioning
consumption, including electric energy. Electricity con-
and other climate-related needs. Historical data show
sumption has increased from 5.5 billion kilowatt/hour
that the rate of growth in electricity consumption is
(kWh) in 1980 to about 36 billion kWh in the year 2000,
higher than the growth rate of the economy. Electricity
as indicated by Fig. 1. This represents an average annual
consumption patterns are thought to be important
growth rate of 10%, far above the 3% world average.
determinants of electricity consumption growth in the
In addition, per capita electricity consumption in the
UAE. Current energy policies, including massive sub-
UAE has reached 10,719 kWh/year in 1998. This level is
sidies to final consumers, are believed to contribute to
compared to 7500 kWh/year in the Organization for
inefficient use of energy and a rapid growth of electricity
Economic Co-operation and Development (OECD)
demand. These subsidies aim at providing power to the
member countries, 482 kWh/year in Asia, 490 kWh/year
population at affordable, below cost, rates. The average
in Africa and 1402 kWh/year in Latin America (Secre-
annual figure of the UAE government subsidies for the
tariat of the World Commission on Dams, 2000). As
power sector is estimated at more than $270 million.
Fig. 2. indicates, UAE enjoys the highest per capita
electricity consumption among this group of countries,
2.2. Electricity supply
considerably higher than the world average.
Electricity demand in the UAE has been characterized
The UAE has a well-established electricity sector
by an unprecedented growth since the formation of the
owned and run by a number of local government-owned
State in 1971. Additionally, demand shows a consider-
utilities. The energy sector has been able to satisfy the
able variation seasonally between a peak demand in the
soaring growth in electricity consumption easily by
1
Data used in Section 2 are from US Energy Information
adding new generation capacity. The installed capacity
Administration (EIA, 2003), Central Bank of UAE (2003), and UAE’s was estimated at 9500 megawatt (MW) in 2001. This
Federal Water and Electricity Authority (FEWA) annual reports. capacity is expected to double by 2010. Electric energy
 ARTICLE IN PRESS
2352 M.A. Al-Iriani / Energy Policy 33 (2005) 2350–2360
in the UAE is supplied by four independent utilities. The
federal government has launched a project to set up a
unified power grid that will connect all emirates’ power
utilities in preparation of connecting the Emirates to a
unified grid with other countries of the Gulf Coopera-
tion Council (GCC).
The power sector in the UAE has recently undergone
some important restructuring changes. Supply-side
measures, which are concerned with achieving efficient
provision of electric power to end user, are being
adopted. The country’s current energy policies call for
expanded power generation to meet electricity demand
growth. For example, the Emirate of Abu Dhabi is
leading in restructuring efforts aiming at meeting its
estimated required 4500 MW of electricity generation
capacity by the year 2010, through privatization of its
power sector. Eleven new companies for generation,
transmission and distribution were formed by late 1999.
At least two benefits of privatization, and the
reduction of public utilities monopoly power, are
starting to be realized. The first is the production of
required power at lower cost than before.2 The second,
and more important benefit, is that attraction of
significant amounts of capital, needed for increased
generation capacity and the power sector expansion,
largely from foreign sources. Estimates indicate that the
commercial value of planned power and water sector
projects in the UAE reached $9 billion as of 1998. Abu
Dhabi succeeded in the initiation of the first independent
power project of Al-Taweelah. The $700 million cost of
the project is being financed largely by foreign investors.
This was a first step to reduce the direct involvement of
government in financing utilities infrastructure in favor
of its policy role. Privatization will free up public
resources needed for other services provided by the
government. The restructuring of Abu Dhabi’s power
sector is being keenly watched by other emirates. They
are expected to follow sooner or later, as the success of
current experience materializes.
3. Electricity DSM
3.1. Benefits of DSM programs
A DSM program may be defined as a ‘‘set of
customer-focused activities that are intended to affect
the amount and timing of customer energy use cost-
effectively,’’ (Vine, 1996, p. 983). Such programs involve
the design and implementation of various measures that
aim at managing electricity loads (load management
programs, or peak-clipping and load shifting) and
2 3
Officials at Al-Ain Distribution Company estimate that per unit
production cost has decreased by at least 16% since privatization
started.
reducing overall consumption growth of electric power
(energy efficiency programs).3
It is widely cited that DSM is a successful way of
reducing the need for new generation capacity, by
improving efficiency in electricity end use (Vine, 1996;
Fitzpatrick, 1991; Dulleck and Kaufman, 2003). In a
broader economic sense, DSM helps in achieving a more
efficient allocation of resources by reallocating these
resources from the electricity sector to other sectors of
the economy. According to some estimates, potential for
electricity efficiency in high income countries like UAE,
which has high per capita electricity consumption, may
reach 50% (Secretariat of the World Commission on
Dams, 2000). End use efficiency improvements provide
multiple benefits such as financial benefits to consumers,
in addition to social and environmental benefits.
Specifically, at least four major benefits of DSM were
cited in the literature. First is the savings in required
capital for added generation capacity. Second is the
reduction in the cost of providing the service to end
users. Third, are the environmental benefits from
reducing electricity-related CO2 emissions. Finally,
DSM is economically sensible to utilities by offsetting
or delaying significant generation and distribution
investments (Boyle, 1996).
3.2. The DSM international experience
The concern in the industrialized countries over
increasing cost of fossil fuel and uncertainty about its
continuous flow, especially from unsettled regions like
the Middle East, has ignited an increasing interest in
DSM in these countries. Early DSM programs were
launched in North America and Europe in the 1980s.
Numerous DSM programs costing billions of dollars
were created in the USA alone. Other countries all over
the world are benefiting from the early experiences of
DSM in launching their own programs. Transferring
DSM technologies to developing countries is gradually
occurring, but with some problems (Aticol and Güven,
2003). However, DSM programs have not been con-
sidered in countries rich with energy resources. From an
economic point of view, abundance of energy resources
does not negate the need for a more efficient manage-
ment of such resources. A commitment to energy
efficiency via electricity DSM in these countries might
be needed.
3.3. Electricity demand management in the UAE
The UAE country is rich in fossil fuel resources that
can be used to produce its needs of electric power for
Estimates of future demand reductions from DSM can be based on
evaluations of the difference between electric energy consumption with
and without the DSM program.
 ARTICLE IN PRESS
M.A. Al-Iriani / Energy Policy 33 (2005) 2350–2360
many years to come at reasonable cost. As a result, the
UAE’s current energy policies aim at satisfying the
growing demand for electricity through additional
power generation. Little, if at all, attention is done to
promote electricity conservation. As mentioned above,
the government of Abu Dhabi has taken steps to
improve efficiency in supply side (generation, transmis-
sion and distribution of electric power). To our knowl-
edge, despite the high level of growth in electricity
consumption in the UAE, DSM has not yet been
considered as a policy option.
4. Demand estimation and forecasting
Electricity demand estimation and forecasting is
important due to the considerable time required for
planning and constructing new plants to meet such
demand. Because over- or under-capacity incurs large
costs, utilities need as much accurate estimates and
forecasts as possible.
4.1. Methodology
Fisher and Kaysen in their pioneer study published in
1962 and surveyed by Brendt (1991) modeled electricity
consumption as a function of aggregate stock of
electricity—using appliances, level of income, and
electricity price. However, data requirements make it
almost impossible to use this model in practice for the
UAE. Even in countries with longer history of data
documentation on electricity sector, it has always been
difficult to obtain data on aggregate stock of appliances.
To make this model empirically estimable, many
attempts have appeared in previous work to indirectly
including variables with inadequate data.4 Brendt (1991)
provides an excellent survey of such attempts.
We will follow such practice. Given poor data
availability in the UAE some adjustments to this model
must be made. The location of UAE in the Gulf, which
is characterized by extra hot climate for at least half of
the year, makes outside air temperature one of the most
important factors in electricity monthly demand varia-
tion. Previous studies have emphasized on the impor-
tance of outside air temperature in explaining electricity
demand (Valor et al., 2001; Yan, 1998). The importance
of climatic effects on electricity consumption in the
UAE has been addressed in a pioneer study by Al-Faris
and Ghali (2000). The authors used monthly data on
aggregate electricity consumption in the western region
of UAE to estimate and forecast peak-load profiles for
electricity consumption in that region. They concluded
4
Brendt (1991) surveys some of these modifications. However, in the
case of UAE, even with these modifications, the researcher will still be
faced with additional difficulties due to data unavailability.
2353
that seasonal variation in air temperature is a main
cause of seasonal variation in electricity consumption in
the short run. Hence, a reasonable extension to Fisher
and Kaysen’s model is to assume that the utilization rate
of the stock of appliances is strongly affected by the
outside air temperature. Our proposed model of
electricity demand is therefore
E t ¼ f ðC t ; TÞ; ð1Þ
where Et is time t aggregate electricity consumption, Ct
is time t outside temperature, and T is a time trend to
account for factors like income, population and
technological level. Some specification of the demand
function (1) might be estimated given data availability of
the dependent variable and the independent variables.
Demand can then be estimated using some appropriate
method after examining data properties.
Our goal is to establish a testable model using
monthly time series data. The model will then be used
for forecasting, and DSM analysis. The literature is rich
with functional forms and estimation procedures that
have been used in estimation and forecasting. The most
important factor influencing our choice of the empirical
model is the properties of our time series. A standard
procedure is to first test for plausible properties of the
series that makes the estimated model satisfy the
standard regression assumptions.5
Among many functional forms that have been used in
the literature to estimate electricity demand, we will use
the following simple model in our estimation:
E t ¼ a0 þ a1 T þ a2 C t þ u t ; ð2Þ
where E t is the log of aggregate electricity consumption
in month t, C t is the log of a climate variable and T is a
time trend, and ut is an error term. We chose this
functional form for its simplicity. Even though more
complex models have appeared in the literature,
experience shows that marginal gain from more complex
models is usually limited (Von Hirschhausen and
Anders, 2000).
4.2. Data
Needless to say, data availability is a major concern
for all those trying to do serious analysis of economic
phenomenon in any country. The UAE is no exception.
The only useable data available to the author was
obtained for Al-Ain, which is the second major city in
Abu Dhabi Emirate. We will use Al-Ain data for our
purpose of exploring DSM options and possible benefits
from implementing such electricity conservation theme.
Monthly electricity consumption data spanning the
years from 1981 to 2000 was provided by Al-Ain
5
For the model y ¼ b1 þ b2 x þ u, the assumptions are: EðuÞ ¼ 0;
varðuÞ ¼ s2 ; covðui ; uj Þ ¼ 0; and u  Nð0; s2 Þ.
 ARTICLE IN PRESS
2354 M.A. Al-Iriani / Energy Policy 33 (2005) 2350–2360

Distribution Company. Daily minimum and maximum Table 1

outside air temperature were provided by Al-Ain OLS estimates of Eq. (2)
Meteorology Department. Parameter Estimate Std. error t-Statistic Prob.
It is customary to measure temperature by daily
heating degrees and cooling degrees. Both heating and a0 2.892180 0.017584 164.4797 0.0000
cooling degrees measure our need to adjust inside a1 0.007365 0.000105 70.45126 0.0000
a2 0.001877 0.000004 50.62229 0.0000
temperature as the temperature falls or rises, respec-
R-squared 0.971907
tively (Pankratz, 1991). We will define daily heating Adjusted R-squared 0.971670
requirement as 18 1C minus the average daily tempera- S.E. of regression 0.111794
ture when the average daily temperature is below 181, Durbin–Watson stat. 0.787526
and zero otherwise.6 Alternatively, cooling degrees
requirement is the average daily temperature minus
181 when the temperature is above 181, and zero The errors of this model might be serially correlated
otherwise. The monthly heating degrees and cooling with their own lagged values. That is,
degrees requirements are the sum of the daily heating ut ¼ z0t1 g þ et ; ð4Þ
degrees and cooling degrees, respectively.
where z0t1 is a vector of variables known at time t that
might contain lagged values of u or e, or both; et is the
4.3. Preliminary analysis
innovation in errors, and g is a vector of parameters that
represents the correlation coefficients of the errors.
Eq. (2) was estimated using the ordinary least squares
Estimating the model in (3) without taking into
(OLS) method. The results of the estimation are
account the effect of (4) will violate the standard
presented in Table 1. A small Durbin–Watson test
regression assumption of no serial correlation of errors.
statistic indicates that the model residuals (the difference
Furthermore, if there are lagged output or/and input
between estimated and observed values) are serially
variables on the right-hand side of (3), OLS estimates
correlated, a common problem found in regression using
are biased and inconsistent.
time series data.
A widely used model of serial correlation is the
Correlated residuals indicate that modifications to the
Autoregressive Integrated Moving Average model,
model that takes into account the stochastic properties
ARIMA.7 The model uses three tools of modeling the
of the time series data are necessary before any
serial correlation in the disturbances: an auto regressive
meaningful analysis and forecasting can be conducted.
(AR) term of the form
To test for such properties, we will use Box–Jenkins
methodology (Box and Jenkins, 1976), a well-known ð1  f1 B  f2 B2      fp Bp Þut ¼ et ; ð5Þ
and widely used methodology named after its devel-
opers, George E. Box and Gwilym M. Jenkins. The where Bi indicate the backshift operator and fi are
appealing features of this methodology are that the parameters . Each AR term corresponds to the use of a
model is chosen through a process that does not assume lagged value of the residual (estimated error) in the
any particular pattern in the historical data of the series forecasting equation of ut . The model also uses a moving
to be forecasted. It identifies a useful model from a average (MA) term of the form
general class of models. ut ¼ ð1  y1 B  y2 B2      yq Bq Þet ; ð6Þ

where each MA term corresponds to the use of a lagged

4.4. A dynamic regression model
Consider the model
yt ¼ x0t b þ ut ; ð3Þ
where x0t is a vector of explanatory (input) variables
observed at time t, b is a vector of parameters and ut is
an error term, and yt is the output variable. Eq. (3) is
sometimes called a dynamic regression (DR) model if
the output variable is related to current or/and past
values of the input variables as is the case with time
series data.
6 8
The choice of 181 is based on the fact that heaters are rarely used in
the UAE.
value of the forecast error to improve the current
forecast. Finally, an integrating order (I) term that
represent the degree of differencing the series is added.
Including the information in (4)–(6) in the regression
model might help avoiding the problems associated with
serially correlated disturbances.8
Box and Jenkins popularized a three-stage methodol-
ogy that calls first for identifying an ARIMA model that
can best describe the true, unknown, data generating
process. The identified model is then used for estimation
7
For a detailed discussion of these types of models see Box and
Jenkins (1976).
If the disturbance is correlated and we do not take that into account
in estimation, the t test for parameter significance is invalid.
 ARTICLE IN PRESS
M.A. Al-Iriani / Energy Policy 33 (2005) 2350–2360 2355

and forecasting. Pankratz (1991) recommends that in Fig. 3. This correlogram displays a 12-month SACF
ARIMA be used as a preliminary model of the data and a multiple of its standard errors to test for
generating process for three main purposes. First, it can significance. The slow decay of the estimated SACF is
be used to estimate and forecast the output variable an indication that the data series is not stationary.
using its own lagged values. The results are then Inspection of the time series properties indicates that
compared to the forecasts obtained from the DR model two types of transformation are needed to achieve stable
in (3). Second, we can represent the serial correlation of mean and variance. Logarithmic transformation of the
the disturbance in the DR model using an ARIMA data is used in order to achieve stability of the variance.
model for the disturbance (ut ) as in (4)–(6). This will To make the data stationary, both regular and seasonal
improve our forecasts from Eq. (3). Finally, using differencing of the data is usually recommended. It is
forecasts of input series from its ARIMA representation also recommended to difference the data after log
allows us to forecast the output variable in its DR transformation has been performed, if the latter is
representation. needed.
The first step in our analysis of the time series data After performing both regular and seasonal differen-
will be to use the ‘‘identification’’ stage of Box-Jenkins’ cing, the consumption series appears to have become
methodology to briefly explore the data-generating stationary as Fig. 4 indicates. The series returns quickly
processes of the electricity consumption and cooling to the overall mean of zero. The SACF cuts after only
degrees series. The input series for ARIMA requires that two lags. These new characteristics indicate that we were
the data have time invariant mean and variance, i.e., the successful in transforming the series to have stationary
series is stationary. Identification of the model involves mean and variance.
visually examining time plots of the series and its As for the cooling and heating degrees series, an
autocorrelations to test for non-stationarity. Formal inspection of the calculated heating degrees and cooling
tests, like the popular Dickey–Fuller (1979, 1981) tests, degrees revealed no significant heating degrees for Al-
can also be performed to test for the presences of unit Ain area. That is, outside temperature is always at a
roots that are an indication of non-stationarity of the level that is above any significant heating requirements.
data series. Therefore, only cooling degrees series is used in our
Fig. 3 is a plot of monthly electricity consumption and analysis. Cooling degrees series from January 1981 to
its sample autocorrelation function (SACF). The plot December 2000 and its SACF are plotted in Fig. 5.
reveals three major characteristics of the data. First, the Visual inspection of the cooling degrees and SACF plots
variance seems to be increasing over time. Second, reveals a strong seasonal pattern in cooling degrees
consumption does not fluctuate around a constant requirements as expected. The mean and variance for
mean, i.e., there is an increasing trend in the data. This the whole sample appears to be fairly stationary and
indicates that the data is not stationary. Third, the level therefore no regular differencing is required. However,
of the series is shifting in a systematic fashion, i.e., the higher values repeat systematically across years. This is
series is seasonal. These observations indicate that some an indication of seasonality of the data that calls for
transformation is needed before any meaningful estima- seasonal differencing.
tion can be preformed. The data should be modified to Seasonally differenced series and its sample correlo-
induce a constant mean and variance. gram are plotted in Fig. 6. Seasonal differencing
The time series properties of the consumption series appears to have removed the seasonal pattern in the
can also be examined using the correlogram of the series series. The SACF decays slowly but autocorrelations are

Electricity Consumption SACF

700 1
600
Sample correlations

500
Million kWh

400
0
300

200
100

0 -1
1 2 3 4 5 6 7 8 9 10 11 12
Jan -81

Jan -86

Jan -91

Sep-92

Jan -96
May-84

May-89

May-99
Sep-82

Sep-87

Sep-97
May-94

Months
(Bars indicate autocorrelations; dashed lines
indicate two standard errors.)

Fig. 3. Monthly electricity consumption in Al-Ain City and its SACF.

 ARTICLE IN PRESS
2356 M.A. Al-Iriani / Energy Policy 33 (2005) 2350–2360

Seasonally and First Regular Difference of Log-

Transformed Consumption Series SACF
0.8 1

Sample Autocorrelations
0
0

-1
1 2 3 4 5 6 7 8 9 10 11 12
-0.8
Months
(Bars indicate autocorrelations; dashed lines indicate
two standard errors.)

Fig. 4. First and seasonally differenced series and its SACF.

Cooling Degrees Series (C0) in Al-Ain City SACF (For Cooling Degrees Series)
25 2
Cooling Degrees (C0)

20

Autocorrelations
1
15
Sample

10
0
5

0 -1
Jan-81
Jul-82
Jan-84
Jul-85
Jan-87
Jul-88
Jan-90
Jul-91
Jan-93
Jul-94
Jan-96
Jul-97
Jan-99
Jul-00

1 2 3 4 6 57 8 9 10 11 12
Months
(Bars indicate autocorrelations; dashed lines
indicate two standard errors.)

Fig. 5. Cooling degrees series and its SACF.

Seasonally-Differenced Cooling Degrees Series SACF

2.0 2
Sample Autocorrelations

1
1.0

0
0.0

-1
-1.0
-2
1 2 3 4 5 6 7 8 9 10 11 12
-2.0
Months
(Bars indicate autocorrelations; dashed lines
indicate two standard errors.)

Fig. 6. Seasonally differenced cooling degrees series and its correlogram.

insignificant after the first lag. The series is now ready to generation process of electricity demand adequately. We
be used in our estimation and forecasting procedure. We tentatively arrived at the following representation for
may use a forecast of cooling degrees input using an the disturbance term:
ARIMA model for this series to forecast E in our
ð1  y1 B  y2 B2 Þð1  y12 B12 Þr12 ret ¼ C þ ut : ð7Þ
dynamic model.
Eq. (7) indicates that the model has two moving
4.4.1. An ARIMA model average terms MA (1), MA (2) represented by the
The Box–Jenkins methodology was used to identify a operatorð1  y1 B  y2 B2 Þand one seasonal moving aver-
parsimonious model that, we believe, represents the data age SMA (12) term represented by the operator
 ARTICLE IN PRESS
M.A. Al-Iriani / Energy Policy 33 (2005) 2350–2360 2357

ð1  y12 B12 Þ. The r and r12 indicate the first regular Fitted DSM Actual
difference and a seasonal difference of order 12 of the 800
series, respectively. 700
Accordingly, Eq. (2) is rewritten as, 600

Million kWh
500
r12 rE t ¼ b0 þ b1 T þ b2 r12 rCDt
400
þ ð1  y1 B  y2 B2 Þð1  y12 B12 Þet : (8) 300
200
100
0
4.4.2. Estimation results

Jan-81

Jan-83

Jan-85

Jan-87

Jan-89

Jan-91

Jan-93

Jan-95

Jan-97

Jan-99

Jan-01
The model proposed in (8) was estimated and
estimation results are summarized in Table 2. The
Fig. 7. Actual, fitted and forecasts of electricity consumption with
results indicate that all the respective parameters are DSM.
significant at the 5% level, and of the expected signs. In
addition, major improvements as a result of correcting
for the time series characteristics of the data have been 800
realized. 700
Table 2 indicates that the sample standard error is 600
significantly lower as compared to the simple regression

Million kWh
500
of OLS represented in Table 1. The Durbin–Watson test
is close to 2. This is an indication that the hypothesis of 400
no autocorrelation of the residuals is not rejected. In 300
addition, diagnostic checking of the model (not shown 200
Without DSM
here) indicates normally distributed residuals. This will With DSM
100
improve forecasting precision of the model, compared to
the estimated OLS model in Table 1. 0

May-01

Aug-01
Sep-01
Jul-01

Nov-01
Feb-01
Mar-01
Apr-01
Jan-01

Jun-01

Dec-01
Oct-01
4.4.3. Forecasting and DSM simulation
The estimated model may be used for electricity Fig. 8. 12-month electricity consumption forecast with and without
planning purposes. Forecasts of future electricity con- DSM.
sumption can be conducted and used to asses the
importance and effects of any suggested DSM program.
The fitted model in (8) is shown in Fig. 7. The model decrease in actual daily cooling requirement by 4 1C.
seems to present the data rather well, as the fitted line is The results of this hypothetical reduction are indicated
compared to the line from the actual data. In addition, by the dashed DSM. Even though the model is
using forecasts for the cooling degrees series from our preliminary, forecasted values for electricity consump-
identification process, the extended dashed line shows a tion after the reduction in cooling requirement show a
12-month-ahead forecast for electricity consumption significant drop in electricity consumption and peak
extending to December 2001. load.
In addition, for illustrative purposes, we include in the Fig. 8 shows a 12-month-ahead forecast for electricity
graph a simulation for the effect of a hypothesized consumption without and with the cooling degrees
reduction. It is needless to say that the relationship
Table 2 between cooling degrees and power consumption is
Estimation results of Eq. (2) modified for time series characteristics of positive. A DSM program that succeeds in reducing
the data cooling degrees requirement should help in reducing
Parameter Estimate Std. error t-Statistic Prob.
peak demand and overall power consumption as
indicated in the figure.
b0 0.001811 0.000777 2.330697 0.0207
b1 0.0000136 0.0000005 2.364498 0.0189
b2 0.027618 0.009630 2.867948 0.0045
5. DSM in the UAE
y1 0.480710 0.051361 9.359381 0.0000
y2 0.318923 0.053902 5.916689 0.0000
y12 0.715812 0.037368 19.15569 0.0000 A comprehensive electricity conservation procedure
R-squared 0.556216 combines efficiency efforts in the supply side of
Adjusted R-squared 0.546176 electricity with comparable effort to conserve energy at
S.E. of regression 0.058829
the consumer side. In the literature, such procedure is
Durbin–Watson stat 1.914698
termed ‘‘integrated resource planning’’. it involves
 ARTICLE IN PRESS
2358 M.A. Al-Iriani / Energy Policy 33 (2005) 2350–2360
integrating DSM with supply-side resource planning.
These programs have been cited in the literature as an
efficient tool that will help to curb the growing electricity
demand and reduce the burden of power provision at
peak times (Hirst and Reed, 1991; Johansson and
Goldemberg, 2002). There are many success stories that
can be identified about DSM programs in those
countries with early adoption of such programs.
Integrating DSM programs has gained its largest
momentum in such countries because of concerns about
continuity of resources imported from unsettled regions
like the Middle East and also environmental concerns.
Given the empirical results obtained above, an
important factor affecting energy consumption and load
formation in the UAE are the climate conditions.
Hence, an important ingredient of any DSM program
may take into account this fact. Since the UAE is known
for its extremely hot summer season but a mild winter, a
DSM program should be designed to reduce cooling
degrees requirements of electricity consumers. Measures
include reducing the effect of outside temperature on
these requirements.
A DSM pilot program that targets a limited number
of measures and participants, and that has increasing
efficiency in air conditioning as one of its major
measures is expected to indicate effects of DSM in
terms of cost savings and energy conservation. The
choice of program actions depends on the program
objective of achieving highest benefits from the program
at the lowest cost.
Once the pilot program shows the potential saving to
policy makers, a full-scale DSM program might be
launched. As indicated before, the direct benefits of a
DSM program are the amount of kilowatt hour (kWh)
of energy saved yearly and peak demand reduction
(kW). These benefits will accrue to the generating
utilities and consumers, but eventually to the national
economy as it is assumed that administering a DSM
program is lower in cost than acquiring new generation
capacity. Indirect effects include environmental benefits
of the reduction of emissions from additional generation
plants.
Keeping in mind that consumers are motivated by
their economic self interests, particularly saving money,
options for DSM programs may include:
(1) Minimum efficiency codes and standards: UAE is
characterized by severe climate conditions during
the summer season. Yet the country, to our knowl-
edge, does not have well-designed requirements for
appliance and lighting standards, and efficiency
labeling.
(2) Building codes: in countries with high cooling
requirements, authorities implement minimum
building standards including required insulation
and efficient air conditioning methods to improve
energy efficiency in newer constructions. Such
standards are not applied in the UAE and needed
to be identified.
(3) Information and education campaigns: to increase
public awareness of energy efficiency, such cam-
paigns are usually targeted at end users. They
explain practices of energy conservation and un-
cover benefits to both the end user and the society.
(4) Energy efficiency assistance: providing public funds
to the end users in older buildings to replace their
old inefficient equipments with new more efficient
ones, investment in energy-efficient equipments,9
and insulation improvements to these buildings.
(5) Pricing measures: making the price of electricity
reflects its true cost, including time-of-use pricing
aimed at load management and peak load shaving.
These measures may include rebates for conserved
energy.
The pricing measures warrant some analysis, since
they affect the self incentive of energy conservation on
the part of customers. Well designed pricing policies,
that take into account the marginal opportunity cost of
electricity, should result in economic agents behaving
efficiently.
To design such measures, some background on the
current pricing policies should be presented. Current
end use tariff has been designed to be different among
consumer groups. Local households (Nationals) are
charged a flat rate of 5 fils per kWh (less than 1.4 US
b).10 Commercial users and other non-national house-
holds are charged 15 fils/kWh, whereas actual cost of
electricity to end user is estimated at around 30 fils/
kWh.
As a result of these pricing categories, the economic
incentive for energy conservation is higher in the
commercial sector and non-national households.
However, since these two groups of consumers are
renters, they have little control on energy conserva-
tion planning at the construction stage of buildings. In
fact, building owners have no incentive to bear the
added cost of insulation and higher efficiency air
conditioning units during construction. The result of
the lack of economic incentive is the observed construc-
tion of buildings that do not meet any minimum
efficiency standards.
Opportunity cost pricing of electricity power calls for
higher tariffs for all consumption groups. This will
definitely lead to more efficient use of energy. The
particular effect of a price hike on each group of
consumers will be different because of different demand
elasticities resulting from the current pricing differential.
9
Some energy-efficient air conditioning units have been shown to cut
peak demand by 38% (Fitzpatrick, 1991).
10
A fractional monetary unit in UAE equals to one hundredth of a
dirham, which is the national currency.
 ARTICLE IN PRESS
M.A. Al-Iriani / Energy Policy 33 (2005) 2350–2360
The pricing measures have to be supplemented by a
launch of information and educational programs show-
ing the potential benefits, to the consumer and society,
of a more efficient use of electric energy. As demon-
strated above, a small reduction in cooling degrees
requirement has a significant potential in reducing
electric energy consumption.
In summary, reducing cooling degrees requirements
can be achieved through:
a. Tolerating a little higher inside temperature. Here,
price measures and educational campaigns might be
effective.
b. Increasing the difference between outside and inside
temperature levels by insulation methods. Here,
construction efficiency codes are best candidates.
c. Reducing the energy required to achieve a certain
level of comfort. Here, minimum efficiency codes and
standards for air conditioning units are called for.
d. Reducing the inefficient use of energy, such as
turning off air-conditioning units and lights in the
unused areas of the building. Here, educational
campaigns are called for, but pricing measures might
be more effective.
6. Conclusion and policy implications
Electricity consumption in the UAE has been
characterized by a rapid growth during the last 20
years. This rapid growth is expected to continue in the
future. Electric energy conservation programs can help
in slowing down the pace of growth in electricity
consumption and the need for added generation
capacity to meet peak demand. DSM programs are
believed to be a successful tool in this direction. These
programs may have different components depending on
the specific energy needs of the country.
Despite the rapid growth in electricity consumption in
the UAE, little, if at all, has been done in the field of
energy conservation. Rather, much attention has been
paid to cost effectiveness of generating the needed
energy via moving the burden to the private sector. The
privatization process that was launched in the Emirate
of Abu Dhabi a couple of years ago has started to pay
off, in terms of attracting a sizable foreign investment
and savings in the cost of kWh generated. However,
utilities are still faced with the challenge of meeting high
demand growth and the requirement of huge invest-
ments to satisfy peak demand.
In the UAE, air conditioning is a major consumer of
electric energy. It was shown that electricity consump-
tion is closely affected by variation in cooling require-
ment which, in turn, is affected by outside air
temperature. The model constructed seems to represent
2359
these relationships rather well, as the analysis indicates.
Forecasts of electricity consumption using the model
indicate that a small reduction in cooling degrees
requirement might induce a significant reduction in
electric energy requirements.
Planning and implementing a DSM program might
include, among others, measures to reduce cooling
degrees requirement. These measures include air con-
ditioning units’ minimum efficiency and labeling stan-
dards, information and educational programs, building
efficiency codes, energy efficiency assistance, and elec-
tricity tariff adjustment to reflect the economic value of
consumed energy.
The results of the analysis are based on the
preliminary analysis using available data from Al-Ain
city. Given the similar climatic conditions in other
regions of the country, these conclusions can be
reasonably generalized. This research can be extended
to construct precise calculations for the potential energy
saving resulting from a well designed DSM program.
This will be possible only when more information and
data are available in the future, which the author hopes
will be the case. The analysis can also be applied to
countries similar in features to the UAE.
Acknowledgements
The author would like to thank M. Khawaja and
Nasri Harb for their valuable comments on an earlier
draft. Thanks are also due to the editor of this journal
and an anonymous referee for the valuable comments
received. Support for this work was provided by the
DVC Office for Scientific Research, UAE University
under Contract No. 02/11-4-01.
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