Scandinavian Working Papers in Economics

Umeå Economic Studies,
Umeå University, Department of Economics

No 968: The price elasticity of electricity demand when marginal incentives are very large

Gauthier Lanot () and Mattias Vesterberg ()
Additional contact information
Gauthier Lanot: Department of Economics, Umeå University, Postal: Department of Economics, Umeå University, S 901 87 Umeå, Sweden
Mattias Vesterberg: Department of Economics, Umeå University, Postal: Department of Economics, Umeå University, S 901 87 Umeå, Sweden

Abstract: Using unique data on Swedish households, we measure the price elas- ticity of electricity demand for households facing a mandatory non-linear distribution tariffs 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 esti- mators, and we find that the price elasticity is smaller than what previous literature on electricity demand have found. Furthermore, we illustrate why charging households based on maxi- mum consumption during a month leads to weak incentives in the end of the month, and discuss alternative tariff designs.

Keywords: Demand flexibility; Non-linear pricing; Peak demand

JEL-codes: D12; Q41; Q48

34 pages, January 30, 2020

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