Estimating Energy Price Elasticities When Salience is High: Residential Natural Gas Demand in Ukraine

Anna Alberini, Olha Khymych () and Milan Ščasný ()
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Olha Khymych: nstitute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic

No 2019/8, Working Papers IES from Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies

Abstract: Despite its importance for policy purposes (including climate policy and the energy transition), evidence about the price elasticity of natural gas demand in the residential sector is very limited and based on inference from situations with modest variation in prices. We focus on a locale and time when price changes were extreme and presumably salient to consumers, namely Ukraine between 2013 and 2017. We exploit the tariff reforms and detailed micro-level household consumption records to estimate the price elasticity of the demand for natural gas. To isolate behavior, attention is restricted to those households that made no structural energy-efficiency upgrades to their homes, and thus kept the stock of gas-using capital fixed. We further examine the short-run elasticity by restricting the sample to a few months before and after the tariff changes. Our results suggest that under extreme price changes, households are capable of reducing consumption, even without installing insulation or making any other structural modifications to their homes. The price elasticity is about -0.16. Wealthier households, people living in multifamily buildings, and heavy users have more inelastic demands. Households reduced consumption even when they received “subsidies,†namely lump-sum government assistance, suggesting that when the price signal is sufficiently strong, lump-sum transfers have only a minimal effect on consumption. We also find some evidence that the stronger the salience, the stronger the responsiveness to price, although this effect is modest and may partly overlap with that of income or baseline consumption. Our data also suggest that the consumers with the lowest uptake of energy efficiency improvements might be those who—by necessity or through skills—are the most productive at reducing energy use through behaviors.

Keywords: Residential gas demand; energy transition; short-run price elasticity; tariff reforms; salience; fuel poverty (search for similar items in EconPapers)
JEL-codes: D12 H31 Q41 Q48 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2019-03, Revised 2019-03
New Economics Papers: this item is included in nep-cis, nep-ene, nep-reg and nep-tra
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