The price elasticity of electricity demand when marginal incentives are very large
Gauthier Lanot, Mattias Vesterberg
Abstract
Using unique data on Swedish households, we measure the price elasticity of electricity demand for households facing a mandatory non-linear distribution tariff, where households are charged based on their maximum consumption during a month, and where the marginal incentives are very large. We estimate the price elasticity using both 2SLS and bunching estimators, and we find that the price elasticity is smaller than what many previous studies on electricity demand have found. We show that the 2SLS estimates are not robust to changes to the set of controls or to the sample definition, while the bunching estimates suggest that the price elasticity of electricity demand is small in response to the large marginal incentives. Furthermore, we illustrate why charging households based on maximum consumption during a month leads to weak incentives in the end of the month, and discuss alternative tariff designs.