Consumers behind solar energy: A case study of households’ demand for four OECD countries

We investigate the households’ demand for solar energy in four major solar-powered countries among the members of the Organization for Economic Cooperation and Development (OECD): Germany, United States, Italy and France, for the period of 2002-2012. Our model is based on the consumers’ utility maximization subject to their budget constraints. We consider a representative consumer who has a constant flow of income to allocate between purchases of electricity and other goods, which we lump together as a composite good. We assume that the consumer has Cobb-Douglass preferences for electricity and the “composite good.” Given the Cobb-Douglass utility function, the consumer allocates a fraction of her income (to the purchase of electricity), hence determining the total expenditure on electricity. The consumer can purchase the electricity either from a utility, or install solar panels that produce electricity. While the electricity generated from solar panels or purchased from a utility is identical in physical terms, a consumer would not necessarily treat them as perfect substitutes. The consumer may have preferences (for example, because of environmental concerns) that may lead her to treat these as separate goods. Hence, we assume that the consumer treats these two as differentiated goods, and has constant elasticity of substitution (CES) preferences over these two forms of electricity. We use a demand model in which the dependent variable is the household’s quantity of installed solar panels. We use a double-log transformation of the demand equation. The independent variables are: per capita income, price of solar panels, the short-term interest rate, representing the cost of financing the project, and the price of traditional energy (solar substitute). We use a fixed-effect estimator for the panel data. The R²for our estimation is 0.94, and all coefficients have their expected theoretical signs, and are statistically significant. Lack of adequate data for evaluation of the effect of government policy is the shortcoming of our demand estimation. Over 20,000 households in ten OECD countries have embraced the use of green energy of which 47% of households use solar appliances (Sims and Gregory, 2003). We will expand our research to examine the effect of government policy on solar use when data become available.