NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Long-Run Dynamics of Electricity Demand: Evidence from Municipal Aggregation

Tatyana Deryugina, Alexander MacKay, Julian Reif

NBER Working Paper No. 23483
Issued in June 2017
NBER Program(s):   EEE   IO   PE

Understanding the response of consumers to electricity prices is essential for crafting efficient energy market regulations, evaluating climate change policy, and investing optimally in infrastructure. We study the dynamics of residential electricity demand by exploiting price variation arising from a natural experiment: the introduction of an Illinois policy that enabled communities to select electricity suppliers on behalf of their residents. Participating communities experienced average price decreases in excess of 10 percent in the two years following adoption. Using a flexible difference-in-differences matching approach, we estimate a one-year price elasticity of -0.14 and three-year elasticity of -0.29. We also present evidence that consumers increased usage in anticipation of the price changes. Finally, we estimate a forward-looking demand model and project that the price elasticity converges to a value between -0.30 and -0.35 after ten years. Our findings demonstrate the importance of accounting for long-run dynamics in this context.

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Document Object Identifier (DOI): 10.3386/w23483

 
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