The study will take into account the reaction of the demand for natural gas when the GDP varies, when the price of NG changes and also the case of variation in the prices of competing fuels.

Knowing how the demand for natural gas in Brazil behaves faced with different circumstances in sectors in which this fuel plays a major role. This is the main goal of the project Estimation of price and income elasticities of natural gas in Brazil: modelling the demand segments taking into account the industrial sector evolution, the electricity generation and the policies for carbon abatement, an initiative of the Research Centre for Gas Innovation (RCGI). The analysis will be target mainly four segments that have had a major impact on the demand for natural gas (NG) in Brazil: the industrial one, which has historically been the largest NG consumer in the country; the electric power segment, due to its use in thermopower plants, which at some moments overcomes the industrial segment; the residential segment, with an upward trend; and the transportation segment, in which the NG is used to power various vehicles.

The studies on elasticity generally aim to understand how a variable behaves in relation to another.

[custom_blockquote style=”green”] “In our case, we are dealing with three types of elasticity: income elasticity, investigating how the demand NG reacts when the GDP increases or decreases; price elasticity, regarding the reactions of demanded quantity due to variations in the price of NG; and also the cross elasticity, which shows how the demand for NG reacts when there is change in the price of a competing source of energy, such as fuel oil or electric power,” explains the coordinator of the project, Professor Virginia Parente, from the Institute of Energy and Environment of the USP (IEE). [/custom_blockquote]

According to her, the income elasticity for energy sources in developing countries has usually been greater than 1, that is, for every 1% of increase in the GDP, the demand for energy has grown over 1%. In the case of the competition with other sources of energy, the direction of the reaction is generally known: “If the competitor fuel price increases, the demand for the other – in this case, natural gas – will increase. However, we want to more accurately know how this occurs. For example, for each percentage point of increase in fuel oil, by how many percentage points does the demand for gas grow? Knowing these relations is important for the decision making process of the agents in the sector, especially those supplying natural gas. Not only these, though. The government is interested in knowing the profile and the reactions of the demand in more depth to design a better planning and to balance incentives,” she states.

Taking into account the point of view of industrial demand, especially for companies in which energy has an important burden in the final cost of their products, it is usual for planners to have to choose, for example, between fuel oil and natural gas as sources of energy for the coming months. “Therefore, this would be the most important relation to study, in the ambit of cross elasticity. This would be followed by the natural gas versus electric power relation, once there are also companies that compare these two production inputs. In the power generation segment, in turn, it is worth establishing the relation between the oil-fuelled and gas-fuelled thermopower plants, since the presence of gas has considerably grown in this segment”.

The expert in energy planning says that there are some researches on the theme in Brazil, but they do not always follow the best practices and, even if they do, those researches always have to be updated. According to her, the studies on elasticity applied to energy examine the behaviour of a relatively recent past, aiming to identify the trend of a near future as regards the convergence or divergence among the variables studied. “For more robust mathematical analyses, a certain amount of data is necessary over time. In our case here, the aim is to observe, on average, the last 15 years to foresee the trend for the next five.”

Social cost – Besides examining the behaviour of the natural gas demand in more depth, Professor Parente and her team – composed by researchers Solange Kileber, Javier Toro, Rinaldo Caldeira and Igor Cesca – intend to suggest public policy measures that could be adopted to differentiate natural gas from the other fossil fuels. “Since natural gas is the least pollutant among the fossil fuels, the idea is to consider its emission potential to differentiate the social cost of using NG, as compared to the high social cost of using oil or coal” she explains.

An example: if the price of (fuel) oil decreases, an entrepreneur may migrate to oil, thinking exclusively about the reducing the individual costs for his company. “Yet, if in the environmental impact is computed into the oil price, the comparison is not solely that of the energy cost, but it also internalizes the social costs of the environmental impact,” she ponders. Natural gas, according to studies in the area, emits from 21% to 25% less greenhouse gases (GHG) as compared to fuel oil and to coal, to deliver the same amount of energy.

In the analysis, the team will also incorporate scenarios concerning the restrictions to GHG emissions. “We will investigate the situation of the demand for natural gas if the international pressure on Brazil for reducing emissions is intensified.”

Virginia Parente explains that, to analyse all these relations, econometric as well as portfolio optimisation methods can be applied. “The portfolio optimisation methods deal, for example, with the following question: What should the participation of the different energy sources be in the composition of the Brazilian energy matrix to maximise safety (minimizing the risks of lack of supply) and to minimise costs? Here the idea is also to analyse the relations of the different sources of energy available in Brazil. In other words, knowing that oil prices oscillate in a certain way, as do those of electric power generated by hydropower plants, those of natural gas, of sugar cane bagasse, of wind and solar power etc., how should Brazil structure its energy mix to ensure the maximum safety at the lowest cost? As we are working within the RCGI context, we are also interested in knowing what specifically can be hypothesised for gas.”

The team coordinated by Prof. Virginia Parente has been working together with the team accounting for another RCGI project coordinated by Prof. Celma de Oliveira Ribeiro (Poli/Production Engineering), integrated Professors Oswaldo Luiz do Valle Costa (Poli/ Electrical Engineering); Julio Stern (IME – Institute of Mathematics and Statistics); and Erik Eduardo Rego (Poli/ Production Engineering). These two teams of USP researchers have been jointly conducting their investigation aiming to provide contributions to the energy planning of Brazil and its developments regarding natural gas.