The price response of residential electricity demand in Germany: A dynamic approach

Abstract

Due to growing concerns about climate change, policy-makers from all around the world establish measures, such as carbon taxes, to lower electricity demand and energy consumption in general. Drawing on household panel data from the German Residential Energy Consumption Survey (GRECS) that span over nine years (2006-2014) and employing the sum of regulated price components as an instrument for the likely endogenous electricity price, 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 the 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.