One price doesn't fit all: An examination of heterogeneity in price elasticity of residential electricity in India

Although well-designed consumer electricity pricing can improve access, contribute to higher metering, increase penetration of energy efficient technologies, limit extent of the rebound effect, and influence viability of electricity distribution utilities in India, there has been no comprehensive, policy-relevant assessment of price elasticities of electricity demand in the country. The objective of this study is to estimate price elasticity of residential electricity consumption and disaggregate it by state, rural and urban residence, and income categories to provide evidence for electricity tariff setting in India. We combine survey data from five rounds of nationally-representative household consumption expenditure surveys covering the period 2005–2012 with administrative data on electricity deficit and improve on methods applied in previous studies by estimating price elasticities using a quadratic form to account for constraints in electricity supply. We find that while the average price elasticity at the national level is −0.39 (95% confidence interval: −0.46, −0.31), it varies significantly by state, rural and urban residence, and income categories. Our results indicate that a “one ‘price’ fits all” policy may not be an effective approach to electricity tariff setting in India and a data-driven understanding of heterogeneities in price elasticities can better inform residential electricity tariff design in the country.     

An empirical analysis of energy demand in Namibia

Using a unique database of end-user local energy data and the recently developed Autoregressive Distributed Lag (ARDL) bounds testing approach to cointegration, we estimate the long-run elasticities of the Namibian energy demand function at both aggregated level and by type of energy (electricity, petrol and diesel) for the period 1980–2002. Our main results show that energy consumption responds positively to changes in GDP and negatively to changes in energy price and air temperature. The differences in price elasticities across fuels uncovered by this study have significant implications for energy taxation by Namibian policy makers. We do not find any significant cross-price elasticities between different fuel types.     

Response of residential electricity demand to price: The effect of measurement error

In this paper we present an empirical analysis of the residential demand for electricity using annual aggregate data at the state level for 48 US states from 1995 to 2007. Earlier literature has examined residential energy consumption at the state level using annual or monthly data, focusing on the variation in price elasticities of demand across states or regions, but has failed to recognize or address two major issues. The first is that, when fitting dynamic panel models, the lagged consumption term in the right-hand side of the demand equation is endogenous. This has resulted in potentially inconsistent estimates of the long-run price elasticity of demand. The second is that energy price is likely mismeasured.To address these issues, we estimate a dynamic partial adjustment model using the Kiviet corrected Least Square Dummy Variables (LSDV) (1995) and the Blundell–Bond (1998) estimators. We find that the long-term elasticities produced by the Blundell–Bond system GMM methods are largest, and that from the bias-corrected LSDV are greater than that from the conventional LSDV. From an energy policy point of view, the results obtained using the Blundell–Bond estimator where we instrument for price imply that a carbon tax or other price-based policy may be effective in discouraging residential electricity consumption and hence curbing greenhouse gas emissions in an electricity system mainly based on coal and gas power plants.     

Estimation of Japanese price elasticities of residential electricity demand, 1990–2007

This paper estimates elasticities of Japanese residential price electricity from 1990 to 2007. The first difference generalized method of moment estimator is employed to avoid dynamic panel bias, which is not considered in most previous studies. The results show that while short-run elasticities are similar to those in previous studies, long-run elasticities are significantly lower in our study. We also find that the price elasticity of Japanese residential electricity consumption is notably affected by income inequality and severe weather. Based on these results, we provide some insights to tailor environmental taxation so as to effectively attain the Kyoto Protocol.     

Electricity demand response to price changes: The Portuguese case taking into account income differences

In this paper we study the behavior of electricity use in Portuguese households using microdata from five independent surveys. Our sample covers the period from 1989 to 2010, which was characterized by major changes in the country. We adopt the pseudo-panel methodology creating 350 cohorts based on the size of the household, the type of location (rural or urban), the region, and the income quintile. Our results show relatively high medium/long-run own price elasticities indicating that an increase in the electricity price due to, for instance, policy intervention would, in fact, decrease electricity use. Cross price elasticities indicate that electricity and gas are substitutes. Additionally, the income quintiles analysis shows significant differences in the elasticities depending on the income group. Hence, political interventions in the electricity sector may have important redistributive effects.     

Swedish industry and Kyoto—An assessment of the effects of the European CO2 emission trading system

We assess the effects on Swedish industry input demands and output of different climate policy scenarios connected to energy policy induced by the Kyoto protocol. We use a unique dataset containing firm-level data on outputs and inputs between 1991 and 2001 to estimate a factor demand model, which we use to simulate different policy scenarios. Sector-specific estimation suggests that the proposed quadratic profit function specification exhibits properties and robustness that are consistent with economic theory; that is, all own-price elasticities are negative and all output elasticities are positive. Furthermore, the elasticities show that the input demands are, in most cases, relatively inelastic. Simulation of the model for six different policy scenarios reveal that effects on the Swedish base industry of a EU-level permit-trading system depends on (i) the removal or maintenance of the current CO₂ tax, (ii) the price of permits, and (iii) the future price of electricity. Our analysis shows that changes in electricity price may be more important than the price of permits for some sectors.     

Industrial electricity demand for Turkey: A structural time series analysis

This research investigates the relationship between Turkish industrial electricity consumption, industrial value added and electricity prices in order to forecast future Turkish industrial electricity demand. To achieve this, an industrial electricity demand function for Turkey is estimated by applying the structural time series technique to annual data over the period 1960 to 2008. In addition to identifying the size and significance of the price and industrial value added (output) elasticities, this technique also uncovers the electricity Underlying Energy Demand Trend (UEDT) for the Turkish industrial sector and is, as far as is known, the first attempt to do this. The results suggest that output and real electricity prices and a UEDT all have an important role to play in driving Turkish industrial electricity demand. Consequently, they should all be incorporated when modelling Turkish industrial electricity demand and the estimated UEDT should arguably be considered in future energy policy decisions concerning the Turkish electricity industry. The output and price elasticities are estimated to be 0.15 and − 0.16 respectively, with an increasing (but at a decreasing rate) UEDT and based on the estimated equation, and different forecast assumptions, it is predicted that Turkish industrial electricity demand will be somewhere between 97 and 148 TWh by 2020.     

Analysis and forecasting of nonresidential electricity consumption in Romania

Electricity consumption forecast has fundamental importance in the energy planning of a country. In this paper, we present an analysis and two forecast models for nonresidential electricity consumption in Romania. A first part of the paper is dedicated to the estimation of GDP and price elasticities of consumption. Nonresidential short run GDP and price elasticities are found to be approximately 0.136 and −0.0752, respectively, whereas long run GDP and price elasticities are equal to 0.496 and −0.274 respectively.     

Electricity demand elasticities and temperature: Evidence from panel smooth transition regression with instrumental variable approach

This study applies a non-linear model, i.e. the recently developed panel smooth transition regression (PSTR) model, and takes into account the potential endogeneity biases to investigate the demand function of electricity for 24 OECD countries from the period 1978–2004. Our empirical results demonstrate that there is a strongly non-linear link among electricity consumption, real income, electricity price, and temperature, a result that is new to the literature. As real income rises, electricity consumption rapidly increases first, and after the level of real income exceeds approximately US$2500, its increasing rate turns slow down. An increase in electricity price has a negative or no influence on electricity consumption. Evidence of a U-shaped relationship between electricity consumption and temperature is supported, and the threshold value of temperature is approximately 53 °F, which is endogenously determined. Furthermore, the estimated elasticities of time dynamic indicate that electricity demand is income inelastic, price inelastic, and temperature inelastic. As time goes on, the absolute elasticities of electricity demand gradually decrease with respect to real GDP and electricity price, whereas they gradually increase with respect to temperature, suggesting that the impact of temperature on electricity demand is becoming more important in recent years.     

An analysis of the welfare and distributive implications of factors influencing household electricity consumption

The deep economic crisis and the sharp rise in electricity prices have reduced electricity demand by Spanish households. This paper aims to analyse the responsiveness of household electricity demand and the welfare effects related to both factors in the 2006–2012 period by applying a demand model estimated with the quantile regression method. The results show that the electricity consumption of medium-high income households is particularly responsive to price increases, whereas that of medium-low income households is more responsive to changes in income. The retail electricity price increases and the economic crisis have led to lower and steeper U-shape price elasticities of demand and higher and steeper N-shape income elasticities of demand. The joint impact of those two factors on the welfare of lower-income households is higher in relative terms (i.e., as a share of household income) than for other income groups. These results suggest that the economic crisis and increases in retail electricity prices have had detrimental welfare effects, especially on the lower-income segment of the population. They should be considered when financing climate and energy policies through the electricity bill and provide a rationale to take such support, which pushes the retail electricity price upwards, out of the electricity bill.     

Regionally-varying and regionally-uniform electricity pricing policies compared across four usage categories

The objective of our research is to predict how electricity demand varies spatially between status quo regionally-uniform electricity pricing and hypothetical regionally-varying electricity pricing across usage categories. We summarize the empirical results of a case study of electricity demand in South Korea with three key findings and their related implications. First, the price elasticities of electricity demand differ across usage categories. Specifically, electricity demands for manufacturing and retail uses are price inelastic and close to unit elastic, respectively, while those for agricultural and residential uses are not statistically significant. This information is important in designing energy policy, because higher electricity prices could reduce electricity demands for manufacturing and retail uses, resulting in slower growth in those sectors. Second, spatial spillovers in electricity demand vary across uses. Understanding the spatial structure of electricity demand provides useful information to energy policy makers for anticipating changes in demand across regions via regionally-varying electricity pricing for different uses. Third, simulation results suggest that spatial variations among electricity demands by usage category under a regionally-varying electricity-pricing policy differ from those under a regionally-uniform electricity-pricing policy. Differences in spatial changes between the policies provide information for developing a realistic regionally-varying electricity-pricing policy according to usage category.     

Demand elasticity of oil in Barbados

The importation of oil is a significant component of Barbados' imports, rising from 7% of imports in 1998 to over 20% in 2009. This increase has impacted greatly on the level of foreign reserves. As a price-taker, relying entirely on imported oil for our energy needs could prove a continuous drain on the economy. With a view to formulating an appropriate energy policy for Barbados, this paper analyses the demand for oil using monthly data from 1998 to 2009. The paper estimates the elasticities of demand for oil by employing PesAran (2001) single equation cointegration approach and comparing the results with countries that rely heavily on imported oil and whose policy objective are to alter their energy structure to rely less on imported oil. The results show that the demand for oil imports is price inelastic in the long run. The consumption of oil is responsive to past consumption, prices, income, electricity consumption and the number of appliances imported in the short-run. A policy framework to reduce the use of oil for electricity consumption via alternative energy sources should be considered and the taxation of oil imports given its elasticity is a good source of revenue.     

Electricity demand price elasticity in China based on computable general equilibrium model analysis

Based on the CGE model, this paper simulates the impact of electricity price adjustment on demand for electricity, and the simulation results show the range of electricity elasticities of different consumers. The elasticities of the high power-consuming sectors are relatively larger. However, the absolute values of the price elasticities are less than one. Furthermore, this paper quantitatively analyses the price elasticity of different categories of users, which are classified according to the objectives of China’s electricity price reform. The elasticity absolute value of Industry & Commerce is around 0.018, that of Residents is around 0.300 and that of Agriculture is around 0.066. Finally, the price elasticities of different consumers in 2005 and 2007 are calculated through the CGE model, and it is discovered that the price elasticity absolute values in 2007 are less than that in 2005. The analytical results of this paper can provide corresponding support for the formulation of electricity pricing mechanisms for the developing countries.     

The residential demand for electricity by time-of-use: A survey of twelve experiments with peak load pricing

Information on customer response to time-of-use (TOU) rates plays a major part in utility resource planning, particularly in the design of cost-based rate structures and cost-effective load management programs. Several elasticity concepts have been used by economists to analyze customer response to TOU rates. We discuss the interrelationships between various concepts and show that total uncompensated price elasticities are the appropriate measure of customer response.Evidence from twelve pricing experiments involving about 7000 customers indicates that residential peak-period electricity consumption is generally price-sensitive. TOU rates generally reduce peak period electricity use, as well as daily use. Response is generally higher for high use customers.Short-run own-price elasticities of peak consumption range from nil to ?0.45. Off-peak elasticities lie in a similar range, but are less statistically significant. This wide range indicates that elasticities are not fixed constants but vary parametrically with several conditioning variables such as level of total (daily) electricity use, composition of appliance portfolio and duration of pricing periods. If proper allowance is made for these interactions, it may be possible to transfer elasticities between utility service areas, thus obviating the expensive and time-consuming need for every utility to conduct its own experiment.     

Estimating short and long-term residential demand for electricity: New evidence from Sri Lanka

This study investigates the short-run dynamics and long-run equilibrium relationship between residential electricity demand and factors influencing demand – per capita income, price of electricity, price of kerosene oil and price of liquefied petroleum gas – using annual data for Sri Lanka for the period, 1960–2007. The study uses unit root, cointegration and error-correction models. The long-run demand elasticities of income, own price and price of kerosene oil (substitute) were estimated to be 0.78, ? 0.62, and 0.14 respectively. The short-run elasticities for the same variables were estimated to be 0.32, ? 0.16 and 0.10 respectively. Liquefied petroleum (LP) gas is a substitute for electricity only in the short-run with an elasticity of 0.09. The main findings of the paper support the following (1) increasing the price of electricity is not the most effective tool to reduce electricity consumption (2) existing subsidies on electricity consumption can be removed without reducing government revenue (3) the long-run income elasticity of demand shows that any future increase in household incomes is likely to significantly increase the demand for electricity and (4) any power generation plans which consider only current per capita consumption and population growth should be revised taking into account the potential future income increases in order to avoid power shortages in the country.     

Electricity consumption forecasting in Italy using linear regression models

The influence of economic and demographic variables on the annual electricity consumption in Italy has been investigated with the intention to develop a long-term consumption forecasting model.The time period considered for the historical data is from 1970 to 2007. Different regression models were developed, using historical electricity consumption, gross domestic product (GDP), gross domestic product per capita (GDP per capita) and population.A first part of the paper considers the estimation of GDP, price and GDP per capita elasticities of domestic and non-domestic electricity consumption. The domestic and non-domestic short run price elasticities are found to be both approximately equal to −0.06, while long run elasticities are equal to −0.24 and −0.09, respectively. On the contrary, the elasticities of GDP and GDP per capita present higher values.In the second part of the paper, different regression models, based on co-integrated or stationary data, are presented. Different statistical tests are employed to check the validity of the proposed models.A comparison with national forecasts, based on complex econometric models, such as Markal-Time, was performed, showing that the developed regressions are congruent with the official projections, with deviations of ±1% for the best case and ±11% for the worst. These deviations are to be considered acceptable in relation to the time span taken into account.     

The impacts of energy prices on energy intensity: Evidence from China

In this paper, we present a review of the deregulation of energy prices in China between 1985 and 2004 and assess the impacts of changes in energy prices on aggregate energy intensity and coal/oil/electricity intensity. We used time series data to provide estimates of energy price elasticities. Empirical results showed that: (1) The own-price elasticities of coal, oil, and aggregate energy were negative in periods both before and after 1995, implying that higher relative prices of different energy types lead to the decrease in coal, oil, and aggregate energy intensities. However, the positive own-price elasticity of electricity after 1995 probably indicates that the price effect was weaker than other factors such as income effect and population effect. (2) The impacts of energy prices were asymmetric over time. (3) Sectoral adjustment also drove the decrease in aggregate energy intensity. Although raising energy prices to boost efficiency of energy use seems to be an effective policy tool, other policy implications concerned with energy prices, such as energy supply security and fuel poverty, must also be considered.     

Industrial electricity demand in New York State

We will discuss electricity demand in manufacturing industries in upstate New York. Empirical results are presented based on data obtained at the electric utility service area level for the years 1969–1981. The equations are based on a partial adjustment model including relevant input prices and industrial output by SIC group. The estimated coefficients have the expected signs and are for the most part, statistically significant. There is considerable variation in price and output elasticities among SIC groups and between service areas, which suggests that energy policy and industrial policy at the state level should be tailored to specific industries and perhaps to specific subregions within the state. Forecasts of industrial electricity demand are based on assumptions of prices and industrial output growth made by the utility companies themselves. A comparison of these forecasts with those made by the utility companies indicates that electricity demand forecasts are sensitive to the inclusion of alternative fuel prices and to the level of sectoral disaggregation.     

The effects of the energy price reform on households consumption in Iran

The substantial subsidizing of energy prices over the years has led to high energy consumption, inefficiencies, fiscal pressures, and environmental problems in Iran. To address the increasing socio-economic problems associated with the energy subsidies, the government embarked on an aggressive energy price reform through which energy subsidies were removed and cash handouts were given to all households in 2010. In this paper, I analyze the effectiveness of the energy price reform in Iran by estimating energy demand elasticities for households in different income groups. I apply a two-stage consumer optimization model and estimate the system of energy expenditures shares using the household budget survey data for the period 2001–2008. The results show that the overall price elasticities of demand are small, but income elasticities are close to one. The results also indicate heterogeneous responses to energy price and income changes in different income groups. Specifically, the urban households show stronger response to price changes, but rural households, particularly mid-income households, to income changes. These findings suggest that the current policy of price increases would not solely be able to reduce energy consumption and, therefore, it should be geared towards increasing energy efficiency through a series of price and non-price measures.     

Short- and long-run time-of-use price elasticities in Swiss residential electricity demand

This paper presents an empirical analysis on the residential demand for electricity by time-of-day. This analysis has been performed using aggregate data at the city level for 22 Swiss cities for the period 2000−2006. For this purpose, we estimated two log–log demand equations for peak and off-peak electricity consumption using static and dynamic partial adjustment approaches. These demand functions were estimated using several econometric approaches for panel data, for example LSDV and RE for static models, and LSDV and corrected LSDV estimators for dynamic models. The attempt of this empirical analysis has been to highlight some of the characteristics of the Swiss residential electricity demand. The estimated short-run own price elasticities are lower than 1, whereas in the long-run these values are higher than 1. The estimated short-run and long-run cross-price elasticities are positive. This result shows that peak and off-peak electricity are substitutes. In this context, time differentiated prices should provide an economic incentive to customers so that they can modify consumption patterns by reducing peak demand and shifting electricity consumption from peak to off-peak periods.