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Energy models

B. Lapillone, P. Criqui, and J. Girod



This paper reviews three types of developments in energy modeling. First, econometric models were enhanced to offer a more realistic representation of energy demand and the economic forces that shape it. Second, technoeconomic or energy end-use models were developed as an alternative approach to explain and forecast energy demand. Third, a number of global energy models were built to incorporate the supply and demand of resources into a multiregional framework of analysis. Some of the criticisms directed at energy models are reviewed, and suggestions are made on how modelers and their models could better serve the users of these analytic tools.


Before the oil crises of the 1970s, economic output and energy demand underwent regular and rapid growth. It was, therefore, acceptable for energy agencies and companies to work with rudimentary energy models that related energy demand to GDP, sectoral value added, and in some cases, energy prices.

After these oil crises, it became apparent that such simplified econometric models could not explain the factors affecting energy demand, assess the potential impacts of policy measures, or forecast the future growth and pattern of energy demand.

Econometric Models

Econometric models use economic indicators (for example, GDP, sectoral output or income, and energy prices) to determine the level of energy demand, in total or by sector or form of energy. In the most common models, the variable coefficients of output and price represent the elasticities of demand with respect to output and price.

Traditional econometric models have several limitations. Price elasticities are difficult to measure, and they exhibit a wide range of values. Their role may also be overemphasized because nonprice factors (for example, conservation programs and efficiency standards) are ignored in these models. Other weaknesses for forecasting include the potential asymmetry between changes in demand caused by a decrease or an increase in prices, and the influence of anticipated and marginal prices (not just average prices) on consumer behaviour. Output or income effects may also be modeled inadequately if there is insufficient disaggregation by economic sector (to show impacts of structural change) or by income group (to show impacts of patterns of income growth).

To overcome these problems, econometric models have become more disaggregated, and they are limited only by the availability of sufficient historical data on the required indicators. Knowledge of price effects has been enhanced by considering both short- and long-term responses to price changes and by allowing elasticities to vary according to the level or rate of change of prices. Finally, more complex models have been built to account for the impacts of capital stocks on energy demand. These models include structural models in which demand is shaped by either the energy efficiency and rate of use of capital stock, or KLEM models, which use production functions to estimate substitution effects among factors of production, including energy.

Technoeconomic (End-Use) Models

Technoeconomic models provide details of the end uses of energy in each of several energy-consuming sectors. They also provide detailed calculations of useful (output) and final (input) energy needs for each end use and sector. End-use models can be used to evaluate demand management and fuel-switching possibilities because they distinguish between useful energy (for example, space heating needs) and final energy (for example, the consumption of oil, natural gas, or electricity) and account for losses due to energy conversion. This modeling approach needs detailed data on end-use coefficients (for example, useful heat energy required per unit of floor area), efficiencies of energy conversion (for example, boiler efficiency), and the stock of energy-consuming units (for example, floor area by type of building or sector).

Accounting models were the simplest and earliest forms of end-use models. Most of the model variables are exogenous (determined outside the model), and the model serves as an accounting tool. The principal advantages of the model are its realism and degree of detail. These models can simulate the impacts of alternative energy policies and programs on fuel- and sector-specific energy demand and the potential for energy conservation and interfuel substitution. End-use models can also be used to develop and analyze detailed balances of energy supply and demand. The disadvantages of these models are that the large quantity of detailed energy and technical data may be difficult and costly to obtain, energy prices are not explicitly considered, and the need for many exogenous assumptions may lead to scenarios that are internally inconsistent.

Technoeconomic models have been improved to explicitly consider price effects. A common enhancement is the incorporation of submodels of market shares that allocate total useful energy needs to competing (present or future) energy forms. These submodels determine fuel-specific shares for each end use on the basis of relative life-cycle costs, which in turn are based on equipment costs and efficiencies, energy prices, the cost of capital, tax rates, and investment incentives (for example, capital grants).

Global Energy Models

Concern about the depletion of nonrenewable resources and shocks in petroleum prices led to the development of global energy models. Three regionally disaggregated supply-demand models were developed by the Workshop on Alternative Energy Strategies (WAES) headed by the International Institute of Applied Systems Analysis (IIASA), the Massachusetts Institute of Technology, and the World Energy Conference (WEC). All three models considered the long-term balance of resource supply and energy demand in five to eight regions of the world. However, each had a particular focus. The WAES model focused on the substitution of coal for oil; the IIASA model, on the long-term prospects for nuclear energy; and the WEC model, on the impact that the rising energy demand from developing countries would have on oil markets. Other global models, such as the Energy Modeling Forum (EMF) and Choe's World Bank model, were designed to deal specifically with petroleum markets. Unlike the other three global models, the oil-market models addressed, albeit incompletely, the issue of energy-economy interactions. Global energy models could be enhanced if world energy data were improved and the importance of links between energy models and macroeconomic models were recognized.

Using Energy Models

There is no single modeling approach for all situations. The choice depends on objectives, the required degree of analytic detail, data availability, and time and budget constraints. Some general guidelines for modelers who want to enhance the usefulness of their models for decision-makers in the energy sector are

· Build as simple models as possible because complex models are increasingly mistrusted,

· Build conceptual and qualitative models, not just quantitative models,

· Use models not only to forecast, but to make and review decisions, and

· Fit models into a single structure to enable users to move from simple energy balances to energy analysis, forecasting, and planning.