Estimating Household Energy Demand of Rural Ethiopia Using an Almost Ideal Demand System (Aids)

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Addis Ababa University


The paper attempts to estimate household energy demand (fuel choice) using panel data for different sources of energy consumption. The study contributes to the contemporary literature a coherent view of energy demand (fuel choice) in rural setup. The result of the finding suggests that as household’s total expenditure rises, fuel option widens and fuel mix may change. They respond by increasing the number of the fuel they use exhibiting fuel stacking (multiple fuel use) behavior but traditional/inferior fuels are rarely entirely excluded from household energy mix. It also suggests that households do not simply substitute one fuel for another due only to income or expenditure increases, rather diversify their fuel consumption in a process of fuel stacking. To envisage this issue deeply the study used econometric tool of the linear approximation almost ideal demand system (LAAIDS) with normalized prices to compute expenditure elasticities and the multinomial logit model of household fuel choice behavior. The fuel stacking (energy mix) model is based on the fact that in any point in time, rural households use multiple sources of energy. Households make inter fuel switch and inter fuel substitution in optimizing their energy mix by adopting multiple fuel use (fuel stacking) strategy in response to income or expenditure change; rather than completely transiting to consumption of new fuels as the energy ladder hypothesis suggests. To prove this, we computed the expenditure or income elasticities of demand for inferior fuels and advanced fuels. The result of the study, that demand is expenditure elastic for advanced fuels and expenditure inelastic for inferior fuels provides solid and consistent argument/evidence to the economic literature that despite the income constraints, households prefer the normal good (advanced fuels) to the inferior goods (traditional fuels). Furthermore, the study used multinomial logit estimate of the determinants of household choice between inferior fuels, advanced fuels and mix of the two fuels to scrutinize the fuel stacking(multiple fuel use) behavior of households in the energy mix model. Our result indicates that household’s total expenditure, the fact that the household is female headed, total land owned by household (holding size), total number of livestock owned by household and family size square as predictor have positive coefficients of parameter estimate. This implies that the likelihood of household’s choosing traditional/inferior fuels or mix of inferior and advanced fuels (except total number of livestock owned) away from advanced fuels increases with increment in these predictors. However, family size, education of household head, age of household head, time spent on fuel collection and expenditure on advanced fuels have negative parameter estimates. This indicates that it is less likely that households choose inferior fuel or mix of inferior and advanced fuels compared to advanced fuel with increase in these variables as predictors. Our result indicates that fuel stacking or multiple fuel use is a more applicable hypothesis for rural households of Ethiopia than the simplistic energy ladder hypothesis. In rural areas, however, energy choice of household is constrained by lack of access to commercial fuels, energy using equipments and appliances, energy supply dependency and affordability as well as consumer preferences and tastes. Therefore, rural households have less potential for fuel switching due to the aforementioned factors and the existence of fuel wood which is gathered without any financial payment.



Natural Resource, Environmental Economics, Natural Resource and Environmental Economics