Ruhr Economic Papers

Ruhr Economic Papers #793

Heterogeneity in the Price Response of Residential Electricity Demand: A Dynamic Approach for Germany

by Manuel Frondel, Gerhard Kussel and Stephan Sommer

RUB, RWI, 02/2019, 38 S./p., 8 Euro, ISBN 978-3-86788-921-6 DOI: 10.4419/86788921

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Abstract

To provide the basis for evaluating the effectiveness of price policies, this paper contributes
to the literature by estimating the heterogeneity in the response of residential electricity
demand to price increases across household types. Drawing on household panel data
from the German Residential Energy Consumption Survey (GRECS) that span over nine
years (2006-2014), we gauge the response of residential electricity demand to price
increases on the basis of the dynamic Blundell-Bond estimator to account for potential
simultaneity and endogeneity problems, as well as Nickell bias. Estimating short- and
long-run price elasticities of -0.44 and -0.66, respectively, our results indicate that
price measures may be effective in dampening residential electricity consumption,
particularly in the long run. Yet, we also find that responses to price changes are very
heterogeneous across household groups, an outcome that has important implications
for policy-making. Most notably, we do not find any significant price response for lowincome
households.

JEL-Classification: C23, C26, D12, Q41

Keywords: Dynamic panel methods; instrumental variable approach

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