DP46 | Net Energy Expenditure and Energy Demand in the UK

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This paper examines alternative methods which have been used to measure aggregate energy consumption over time. It is found that many of the measures which have been widely used in empirical studies are not appropriate for economic analysis. The concept of 'useful energy', popular in engineering applications, is found to be based on too narrow a notion of efficiency for economic analysis. Econometric measures of energy consumption based on production function models are found to be biased due to specification error and may lead to researchers generating econometric results which are statistical artifacts. It is concluded that prices are the most appropriate means of weighting fuel consumption to obtain an aggregate energy consumption index. Such a weighting procedure was originally recommended by Turvey and Nobay in a seminal article in 1965 and their 'Net Energy Expenditure' index is extended in this paper to provide a time series for the United Kingdom running from 1954 to 1980. The value of such an index lies in its use for economic analysis: e.g. assessing trends in energy productivity. It does not appear to have any special advantage over other measures for forecasting applications.