An analysis of the pattern of energy consumption in the United Kingdom and Scotland during the Period 1955-1974

Abstract

There are two principal objectives of this study. The first is to compare the trends of energy consumption between Scotland only and the whole of the United Kingdom and, to examine the causes for any differences that may exist between the two trends. The second objective is to analyse on an aggregate level, the structure of demand for (a) the consumer demand for energy and (b) the derived demand for energy. The consumer demand model is estimated by using a direct utility function, the functional form being a modification of the generalised constant elasticity of substitution (GCES). The assumption behind the model is that the consumer allocates his expenditure between two homogeneous goods namely energy and "non-energy". The derived demand model is estimated by using a production function, the functional form again being a modified GCES. The model is based on the assumption that output is generated by the combination of three aggregate factor inputs namely energy, labour and capital. The parameters for both the utility function and the production function are estimated by using non-linear programming routines that minimise the sum of squares of the residuals. From a knowledge of the utility function the price and income elasticities of demand for both energy and "non-energy" and the elasticities of substitution between energy and "non-energy" are calculated. From a knowledge of the production function the price elasticities of demand for labour, capital and energy and the partial elasticities of substitution between energy, labour and capital are calculated. One of the central features of the analysis is that energy consumption is measured in terms of effective energy instead of final energy which means that the efficiencies with which energy is utilised have been taken into account explicitly in the measure of consumption of energy. The main conclusions of the study with regard to the comparison between Scotland and the whole of the U.K. in the trends of energy consumption are (1) that the overall trends in the consumption of the principal forms of energy (i.e. coal, petroleum etc.) are similar, (2) that the overall efficiency of the energy sector in Scotland is lower compared to the rest of the U.K. and (3) that the share of electricity in the domestic sector and the share of petroleum in the industrial sector are significantly higher in Scotland compared to the rest of the U.K. The main conclusions with regard to the structure of demand are (1) that energy is an inferior good if the unit of consumption is final energy units and it is a normal good if the unit of consumption is effective energy. Since there are no a priori reasons to consider energy as an inferior good, an analysis of energy in terms of effective energy seems more appropriate than one in terms of final energy, (2) if energy is measured in effective energy units, the hypothesis that the utility function is well-behaved can be rejected (3) the overall structure of demand in Scotland is similar to that of the whole U.K. and (4) that a methodology has been established by which all the relevant elasticities of capital, labour and energy can be computed from the derived demand model.