Residential energy demand elasticity in Ghana: an application of the quadratic almost ideal demand systems (QUAIDS) model

Abstract

The paper seeks to analyze residential energy use patterns and the price and energy expenditure responsiveness of household demand for residential energy in Ghana, using GLSS 7 data, the multivariate probit model, and the Quadratic Almost Ideal Demand System (QUAIDS) model. The study focuses on four main fuels; firewood, charcoal, and others (FCO), LPG, electricity, and kerosene. The results show that the demand for all household energy fuels in Ghana was significantly influenced by price, income, and social demographic factors. Household demand for electricity and LPG fuels are income elastic with values greater than 1, while FCO and kerosene fuels are income inelastic. The own-price elasticity also shows modern fuel (LPG and electricity) as the most responsive fuel to a price increase, even though all energy fuels are price inelastic and negative. The complementary cross-price elasticity of all fuels estimated must be carefully interpreted in the context of the cultural factors, socioeconomic factors, and the unique purposes of each fuel. After a robustness check was done in correcting for bias arising from zero energy expenditure, the study finds that the own-price elasticity for modern energy fuel (LGP and ECG) reduced slightly, even though the demand for all energy fuel remains negative and price inelastic. The study includes implications for policies geared towards reducing the price of residential energy fuels and policies to ensure clean and efficient residential energy fuels are readily accessible for consumption.

Keywords:

• residential energy
• demand elasticity
• quadratic almost ideal demand system
• Ghana
• household

PUBLIC INTEREST STATEMENT

Most national discourse on residential energy consumption in Ghana focuses on the devastating impact of traditional energy fuel consumption such as wood fuels on forest depletion, health, and economic growth, calling for the adoption of renewable or modern energy. Largely, Ghana is energy poor posing critical challenges to the economy. Transitioning to modern energy consumption could take a long time in Ghana. However, effectively addressing issues of energy poverty in Ghana can be viewed in two folds; the affordability and availability of energy fuel to meet the energy needs of the households. Similarly, a household’s ability to purchase or adopt efficient energy fuel depends on the elasticity of demand for that fuel. It is given this, that the study seeks to discuss the sensitivity of household demand for residential fuel types to changes in prices and household income to guide government design policies to promote the use of affordable clean modern fuels in Ghana.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. ** Poverty line description according to GLSS7 report = Very poor- ≤ GH 792.05 ($179.46); Poor- > GH 792.05 < GH 1314 and Non poor—≥ GH 1314 ($297.72) NB: 1 $ = GH 4.4134.

2. The study used STATA 15 by applying STATA’s nlsur command with the ifgnls option.

Additional information

Funding

The author(s) reported there is no funding associated with the work featured in this article.

Notes on contributors

Divine Kwaku Kutortse

Divine Kutortse is currently the Programme Officer at the National AfCFTA Coordination office of the Ministry of Trade and Industry, where he is responsible for Trade and Development Finance and Trade in service. He is also the scheduled office for the Market Expansion Project of the National AfCFTA Coordination Office. He holds a Master of Philosophy in Economics from the University of Ghana. He also holds a Bachelor of Arts in Economics from the University of Ghana. His areas of interest include; monetary economics, poverty reduction, energy economics, education economics, Development Economics, Trade policy and Finance, Small and Medium Enterprises Development, and Small Business Financing. His hobbies include reading novels, playing football, and swimming.