Original Research Paper ECONOMIC ANALYSIS OF HOUSEHOLD ENERGY CONSUMPTION: THE CASE OF HERDERS IN MONGOLIA

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1 Orgnal Research Paper ECONOMIC ANALYSIS OF HOUSEHOLD ENERGY CONSUMPTION: THE CASE OF HERDERS IN MONGOLIA GANCHIMEG G., HAVRLAND B. Insttute of Tropcs and Subtropcs, Czech Unversty of Lfe Scences, Prague, Czech Republc Abstract Access to adequate electrcty and heatng s a key factor n ncreasng agrcultural productvty and mprove lvelhoods of Mongolan herder households. Currently, the share of herder households wth electrcty sources accounts for 77.2 per cent of a total of thousand herder households. Ths artcle reports a study whch carred out an economc analyss of the herders demand for electrcty and heatng. We estmated the herder household s energy consumpton based on the energy ladder hypothess, Engle curves and Almost Ideal Demand System (AIDS) model as demand system analyss. The model specfcaton was based on survey n whch the herders were ntervewed about ther household s electrcty and heatng condtons, ts satsfacton, a herder household s ncomes and expendtures, and fuel type that they use. The results of the study show that the Energy Ladder hypothess fts to herder households n Mongola. They use mostly dung, wood, forest and grass waste, and coal wth regard to ther ncome and energy source avalablty. The dung s wdely avalable free of charge, and so t s not selected to a mult-stage budgetng process. The estmated share of energy expendture shows that energy s becomng a necessty for herders. Total household expendture s nversely related to the energy expendture share. Total energy budget elastctes of wood, waste and coal are 1.11, 0.20 and 0.99, respectvely. The man conclusons made on the study results are that the herder s energy consumpton s on a very low level and some effcent polcy nterventons are necessary to mprove the standard of lvng for herder famles Keywords: Economc analyss; electrcty and heatng; energy ladder; Engel curve; herder household; Mongola. INTRODUCTION Although a number of researchers studed the herder households ncome, expendtures, labour productvty, herdng regme, educaton and gender ssues, rsks, yet few of them have n detal been nterested n ther energy consumpton and provson. The Mongolan herders have a worldwde unque nomadc way of lfe. Hence they need a specal way of supplyng adequate and proper energy resources. Access to adequate energy s a key factor to ncrease agrcultural productvty and mprove rural lvelhoods. Provdng multple energy sources for cookng and heatng as well as enough power for ndustry and transportaton, bo energy (and other renewable energes such as solar, wnd and geothermal) can strongly contrbute to ncrease labour productvty and dversfcaton of economc actvtes n rural areas. Accordng to FAO, the energy s an essental element for both the fulflment of basc human needs - especally cookng and heatng, but also hygene, health, etc. and for sustanable rural development, ncludng agrculture, food processng and educaton (FAO, 1999). Transton from the present energy supply of manly frewood and anmal and human power, to a more dversfed base and a better use of commercal energy, s the key factor to mprovng lvng condtons of rural populaton. Currently n Mongola there are 305 (about 91 percent) of total of 332 soum centres 1 and settlements connected to the electrcal transmsson systems. Connectng to the central grdlnes system s possble for the rest of the soums but not for solated herder households due to ther nomadc lfe tradton. About 69 percent of herder households utlze wnd or solar panels only for evenng lght and for a few hours of watchng TV program compatble wth modern human basc needs. Accordng to the Renewable Energy for Rural Access Project (WB Project, 2006), one of the key sgns of the mproved lfe and welfare s access to modern nfrastructure servces, and n partcular to electrcty. Only about 25% of herder households have access to electrcty, compared wth the same access of 80% of soum centre resdents, and over 90% n the urban areas where about 1.5 mllon people lve (Reap, 2006). Ths fndng ndcates that the level of access to electrcty s two tmes lower than offcal statstcal data report. 1 Herder centre 197

2 Most nomadc herder households have no access to electrcty. The man reasons nclude () hgh costs of household power systems coupled wth low ncomes of many herder households; () sustanable polcy support for provdng adequate energy sources to herder household level, and () a nascent market of renewable energy producer whch lacks basc qualty and servce standards. On the other hand, Mongola s endowed wth abundant solar and wnd resources, whch facltate the adopton of solar home systems (SHSs) and small wnd turbne systems (WTSs), two mature and hghly portable technologes that sut the lfestyle of nomadc herders. Wth systems donated by the governments of Chna and Japan, the Mongolan government launched a Solar Sets program n 2001 and provded some SHSs to herder households by 2009 (Zorgt 2009). Thereafter the progress of herders electrcty access has stagnated. The artcle refers the study addressng several objectves: t makes an economc analyss of herder household s energy consumpton and nsght nto the nterrelatonshps between energy consumpton and household wealth (anmal numbers), fnd possble actvtes to have adequate sustanable energy sources. MATERIALS AND METHODS approaches used n studyng the household energy consumpton. Accordng to the classc energy ladder a household at lower levels of ncome and development tends to be at the bottom of the energy ladder, usng fuel that s cheap and locally avalable (Fg. 1). Exclusvely, over three bllon people worldwde are at these lower rungs, dependng on bomass fuels: crop waste, dung, wood, leaves, etc., and coal to meet ther energy needs. A dsproportonate number of these ndvduals resde n Asa and Afrca (Rehfuess and WHO 2006). Coal s seen as a hgher qualty fuel due to ts effcency and storage, and thus s hgher on the energy ladder. As ncomes rse, one would expect that households would substtute for hgher qualty fuel choces. However, ths process has been qute slow. The key determnants of energy demand n the household sector nclude: Prce of fuels and applances; Avalablty of fuels and applances; Dsposable ncome of households; Partcular requrements related to each ndvdual; and Cultural preferences. Wth ncreasng dsposable ncome and changes n lfestyle, households tend to move from the cheapest and least convenent level (fuels) to more convenent and usually more expensve ones (Dzobnsk, 1999). Theoretcal framework of Analyss The survey conssted of the followng steps: 1. The theoretcal framework developed n ths study s the energy mx model whch nfers that households decde on the types of energy sources to use. 2. The energy consumpton behavour was analyzed. That allowed testng varous assumptons on the consumer s behavour. 3. The last step was emprcal study wth collecton of data on household energy consumpton and estmatng emprcal model accordng to the theoretcally-based models. The demand for varous sources of energy has been analyzed theoretcally and emprcally usng dfferent approaches. They nclude the energy ladder hypothess (Kebede et al., 2002; Arnold et al., 2006; Davs, 1998; Masera et al., 2000; Barnett, 2000), the Engel curves (Amacher et al., 1993, 1996, 1999; Mekonnen, 1999; Helberg et al., 2000; Gundmeda and Kohln, 2003; Baland et al., 2005), and energy demand functons (Athukorala et al., 2007; Erdogdu, 2006). The energy ladder hypothess The energy ladder model s one of the most common Fgure 1: The energy ladder Household energy expendture and Engel functon In ths study, Engel functons were estmated for the herder households. A hypothess was assumed that the households frst make ther decson on the allocaton of the total budget on total energy expendture and then decde how much to allocate on ndvdual fuels wthn the energy budget. In ths study the second stage of the step-wse budgetng was tested emprcally by estmatng Engel curves usng the functonal form: 198

3 W=á+â (ln TEE) (1) where, W... Energy budget share of fuel, kwh; TEE... Total energy expendture, curr. and á and â... Parameters to be calculated Engel curves were estmated for frewood, dung, wnd, solar energy and electrcty separately for all and household s averages. The sem-logarthmc model s regarded to be the best suted for emprcal estmatons of Engel functons (Pras and Houthakker, 1955). Budget elastcty (ç) for ndvdual fuels, across sectors and over tme was calculated by dvdng the estmated coeffcent â by the energy budget share (Sadoulet and Janvry, 1995). The Almost Ideal Demand System (AIDS) AIDS s a useful tool n the analyss of household energy consumpton gven the fact that both household expendture and the prces of alternatve sources of energy nfluence the share of any one source of energy n the energy mx (Deaton and Muellbauer, 1980). ω = α + β ln TEE + δx + γ j ln p j + µ R + ϑ Where: ω the share of energy expendture on fuel n total household expendture; p prce of fuel j; curr. X vector of household characterstcs wth correspondng coeffcent; δ actual household characterstcs that go nto the functonal form. They wll be determned by a combnaton of theoretcal, pragmatc and econometrc consderatons; R correspondng th regon of the household ( = 1 5); α, β, γ and μ parameters to be calculated; ϑ error term. Here β s to determne whether energy s a luxury, a necessty or of nferor mportance. If β > 0, then the commodty (energy) s a luxury one, and f β < 0, the commodty becomes a necessty, or of nferor mportance (Deaton and Muellbauer, 1980). The household factor X enters nto the model n lnear specfcaton. The coeffcents of the varables enable us to assess how the energy share s affected by household factors. The parameters of the model are related to the elastcty as follows (Berck et al. 1997) ε = -1 + γ ω - β (3) ε j = γ - β ω j ω ω j ε x = β + 1 (2) (4) (5) Where: ε x and ε j are the prce and ncome (expendture) elastctes respectvely. Herdng households survey has generated more than 50 varables excludng open ended questons. Varable selecton has been made based on statstcal sgnfcance as well as economcs expectatons. Data collecton and household characterstcs The model specfcaton was based on the survey durng whch the herders were ntervewed about ther household s electrcty and heatng condtons, level of ther satsfacton, the herder household s ncome and expendtures, and fuel type that they use. Ths nformaton was used for an economc analyss of energy consumpton of herder households of the fve agro-ecologcal zones. Seventy sx herder households were randomly selected from dfferent agro-ecologcal zones for ths study. Each household was dfferent n several respects, such as: sze, educatonal level and other characterstcs that are expected to have dfferent expendture patterns. Because of these reasons the demand depends not only on prces and famly budget but also on household characterstcs. We dfferentated between electrfed and non-electrfed households as they have dfferent choce sets and ther energy expendture and choce were affected by socoeconomc condtons. The electrfed households use electrcty (small amount), frewood and dung or coal whle the non-electrfed ones used manly frewood and dung or coal whch were not envronmentfrendly. Use of coal and frewood or dung depends on regon s dfferences and avalablty of these sources. The survey was carred out by ntervews wth groups of key nformants. Addtonal data on populaton, prce of fuels were collected from admnstratve records. Survey Results RESULTS AND DISCUSSION Herdng households survey has generated more than 50 varables. Varable selecton was made based on statstcal sgnfcance as well as economc expectatons that we have explored n theoretcal framework and n ths study, too. Comparatvely small sample was selected because due to tmng and cost possbltes some varables dd not represent the herdng households on the natonal level. Most predefned varables were statstcally sgnfcant wth hgher sgnfcance. A total of 19 varables selected from each household and n addtonally three prce vectors were ncluded. Results obtaned through all the three equatons were hghly sgnfcant. We thus nterpret the relatonshps between share of frewood, waste and coal aganst the other selected varables. The share of frewood n the 199

4 energy budget ncreases when the total energy expendture grows whle n the same tme the shares of waste and coal decrease. We may nterpret these results so that frewood s a usual fuel and waste and coal are fuels of an nferor qualty. Besdes ths, also tradtonal approach to energy sources must be taken nto account,.e. the consumpton of frewood and not wastes and coal whch s due to the fact that the frewood s easly avalable and cleaner than the other two fuels. Energy Ladder n the Case of Mongola The result of the study llustrates that the Energy Ladder hypothess fts to the case of Mongola (Fg 2). Fgure 2: Applcaton of the Energy ladder hypothess for Mongola The herder households mostly use dung, wood, forest and grass wastes and coal wth regard to ther ncome and energy source avalablty. The share of energy expendture on the total of herder household budget shows that the energy represents necessty for herders. The varables such as number of anmals, ger sze 2, famly sze and khot al 3 sze have postve relatonshp wth the share of energy expendture - ths s n tune wth our expectatons,.e. a bgger and/or rcher famly requres more energy to cover ther needs. Total household expendture s nversely related to the energy expendture share. Total energy budget elastcty of wood, waste and coal are 1.11, 0.20 and 0.99, respectvely. The number of anmals, ger sze, famly sze and khot al sze had a postve relatonshp wth share of energy expendture. From the total of 76 herder households n the sample, only 16 households or 21% lve close to the central grdlne system whle the rest (79%) are not connected to electrcty transmsson system. Those 16 households lve wthn fve klometres from soum or cty centre lke Darkhan-Uul and Sukhbaatar. The households stuated close to the town centres are usually sem-ntensve or work n more than one sector (mlk and/or some vegetable producton). The samplng dd not purposely 2 Vllage level 3 Herder centre n the steppe select households wthout any electrcty sources; thus the ratos of electrfed and non-electrfed are rather random outcomes. The percentage of electrfed households n our sample s somewhat hgher than the data of Natonal Statstcal Offce of Mongola. Amongst selected herdng households some 37 or 48% have solar or wnd energy generaton devces. Energy Consumpton by an Average Herder Household The calculatons show that an average herder household s basc electrcty consumpton estmate (made by Natonal Renewable Energy Centre of Mongola - NREC), 1.2 kwh (36 kwh per month and 432 kwh per year) could be suffcent f the scarce resources reach ths level. Presently, herder households use 16 W colour TV for 5 hours a day, 13 W fluorescent lamp for 6 hours a day, 0.5 W rado for 10 hours a day - whch s together 160 Wh (0.16 kwh) per day. In our survey, herder household s electrcty consumpton was estmated to be about Wh per day. Ths amount of energy consumpton s tmes lower than that n ctes or towns. Mongolan Governmental program enttled Solar Ger enables herders households to purchase solar panels for reduced prces. The program started n 2005; solar panels of potental 55 W were delvered to the herders households. Its prce was set around MNT ($ US ). In our samplng only three households had hybrd sources of energy (combnaton of solar panels and wnd mlls). Although they use hybrd sources the consumptons were at the level of households wth a sngle source. The Frst Stage of Budgetng Total Energy Expendture: Household Expendture Table 1: Total energy expendture (estmated varables) for selected herder households n Mongola Varable Coeffcents t-statstcs Constant LnTE ** 1.140** LnAnmalValue (x1) FamlyMembers* (x2) EducHH_Head (x3) GerSze (x4) KhotalSze (x5) R Durbn-Watson 2.1 Sgnfcance level * Varable Famly Members has been generated from addng up number of adults and number of kds n the household. Ths varable represents famly sze n general; ** Sgnfcant at 10%. 200

5 Table 1 presents results of the survey on the energy expendture shares of herdng households. In concluson, the model fts the expectatons,.e. all varables are statstcally sgnfcant and are consstent wth the hypothess (see Methodology). The total expendtures are nversely related to the energy expendture share at probablty level of 10 percent. Therefore our assumpton of energy ladder model s n lne wth our survey results. From ths we may assume that energy s a necessty or of nferor sgnfcance (ϑ < 0), (Deaton and Muellbauer, 1980). The varables such as number of anmals, ger sze, famly sze and khot al sze were all n postve relatonshp wth share of energy expendture whch met our expectaton. Certanly a bgger and/or rcher famly would requre more and more energy to cover ther needs. Based on the smulaton results the Engel functon can be represented as the followng formula. Thus: ω TEE = *ln TE * X X 0.011* X + X * * 2 (6) The varables x1 - x5 represent household characterstcs (see Table 1). The functon above allows us to draw the Engel curve. Dfferent ncome levels were appled to estmate correspondng energy budget share. Fgure 3: Engel curve of the energy consumpton The shape of the curve (Fg. 3) shows that the energy s classed as a necessty n the case of herder household s expendture n Mongola. Second Stage of Budgetng Allocaton of Energy Budget Allocaton of energy budget to ndvdual fuels has been the second stage of our modellng. It s connected to a system of equatons, determnng the shares of each fuel n the energy mx of certan households` total energy expendture. The system of equatons was estmated by SPSS. Table 2 offers the estmates of the energy expendture 5 shares of dfferent fuels along wth the overall statstcs,.e. ndcaton of statstcal probablty level of the ndvdual varables. All the three equatons yelded hghly sgnfcant results; we thus nterpret the relatonshps between shares of frewood, waste and coal aganst the other selected varables lsted n the above Table 2. The share of frewood n the energy budget ncreases as total energy expendture ncrease, whereas the shares of waste and coal decrease. Economcally, we may nterpret that frewood s the usual good and waste and coal are of nferor sgnfcance. Besdes, economc nterpretaton can also be tradtonal consumpton of frewood nstead of waste and coal where frewood s easly avalable and cleaner than the other two fuels. Total energy budget elastcty of wood, waste and coal are 1.11, 0.20 and 0.99, respectvely. Thus as total energy expendture ncreases, the quantty of wood ncreases by more than the percentage ncrease n total energy expendture, whereas the quantty of waste ncreases far less than the percentage ncrease n total energy expendture. Surprsngly, the change of coal quantty s nearly the same as the percentage change n total energy expendture. Furthermore, prce elatstces of the selected energy sources s estmated. All own prce elastctes are negatve, whch purely meets the law of demand. Wood s nelastc, whereas the other two are relatvely elastc. All cross prce elastctes have an absolute value of less than one; ths means none of the hghly senstve across fuel source selecton. It can be dfferent wthn a regon; therefore strong regonal ndcators should be ncluded n a follow up study. Both wood and coal are more senstve than waste, especally wood s 10 tmes senstve than waste, whch could be an mportant factor for polcy formulaton. Stmulaton polcy for the use of forest and grass waste could be double ncentves for forest and nature conservaton. CONCLUSIONS 1. Mongolan herder households energy equlbrum s n defcency. Current average consumpton s 160 Wh (0.16 kwh) per day. That does not meet basc human needs. 2. Analyss of the results shows that the herder household s energy supply s consdered as necessty. Varables such as the number of anmals, ger sze, famly sze and khot al sze have a postve correlaton wth the share of energy expendture. 3. The bgger and/or rcher famles wll requre more 201

6 Table 2. Share of ndvdual fuels n herdng households energy consumpton Varable Share Wood Share Waste Share Coal Coef. t-stat. Coef. t-stat. Coef. t-stat. Constant ** ** ** 1.64 LnTEE LnAnmalValue FamlyMembers* 0.44** EducHH_Head GerSze KhotalSze FuelWoodPrce FuelWastePrce ** FuelCoalPrce R Durbn-Watson Sgnfcance level **Sgnfcant at 10% Table 3. Prce elastctes of the selected energy sources demand n herdng households ÄQ ÄP Wood Waste Coal Wood Waste Coal and more energy to cover ther needs. When the sze of herder s anmal herd surpass a certan number (500 and more lvestock heads), then there s lttle correlaton between the level of energy consumpton and growng number of anmals. 4. The poorer herders do not have the possblty to get electrcty themselves. They cannot buy any solar systems although ther prce has recently dropped consderably. It has also been stated that womenheaded households are herdng lower numbers of lvestock than the men-headed ones. 5. The herders have great wllngness to maxmze the numbers of anmals nstead of havng enough energy resources. Ths hypothess has not been proved by our survey. About 80% of herders express ther wshes to have adequate and sustanable energy sources such as central grdlnes system. The households whch started to use small scale wnd electrcty generators or solar photovoltac panels have a negatve mpresson about these sources. 6. The herders request more powerful alternatve energy sources (equpment) n order to assure ther adequate (growng) electrcty consumpton. 7. The relevant Government nterventon polcy s drected towards support of mprovements of rural lvelhood through better management of the energy supply. 8. Mongola has got vast resources of renewable energy and favourable clmatc and weather condtons for ther effectve use. REFERENCES Deaton A. S., Muellbauer J. (1980): An almost deal demand system. Amercan Economc Revew 70(3): Dzobnsk O., Chpman R. (1999): Trends n Consumpton and Producton: Household Energy Consumpton. Economc & Socal Affars. ST/ESA/1999/DP.6 DESA Dscusson Paper No 6. Unted Natons. Chambwera M. (2004): Economc analyss of urban fuelwood demand: the case of Harare n Zmbabwe. [S.l., s.n.]. Rrehfuess E. and WHO (2006): Fuel for lfe: houseehold energy and health, World Health Organzaton (WHO). Badr P.B. (2003): Rural electrfcaton and efforts to create enterprses for the effectve use of power. Appled Energy, N76. Issues 1-3, September-November 2003, pp FAO and WEC (1999): The challenge of rural energy poverty n developng countres. London: World Energy Councl, and Food and Agrculture Organzaton of the Unted Natons. Mongolan Natonal Statstcal Offce (NSO), (2010): Statstcal year book NSO, Ulaanbaatar, Mongola World Bank (2006): Renewable Energy for Rural Access Project n Mongola (REAP). Onlne access: Accessed January 2, 2010 Mnstry of Justce and Home Affars1 (2007): Renewable energy law of Mongola. Ulaanbaatar, Mongola 202

7 Zorgt D.: The Mnster of Mneral Resources and Energy (2009): Avalable onlne open-government.mn/ndex.php?opton=com_ content&task=vew&d=927monday, h Receved for publcaton: June 23, 2011 Accepted for publcaton: October 10, 2011 Correspondng author: Prof. Ing. Bohuml Havrland, CSc. Insttute of Tropcs and Subtropcs Czech Unversty of Lfe Scences Prague Kamýcká Prague- Suchdol E-mal: havrland@ts.czu.cz 203