When Wind Blows Through the Backdoor: Revisiting IV Estimates of Household Elasticities under Real-Time Electricity Pricing During the Energy Crisis

Henri Herrmann, Félix Michelet and Oliver Ruhnau

No 12617, CESifo Working Paper Series from CESifo

Abstract: We estimate household electricity demand responses to hourly prices under real-time pricing using Finnish smart-meter data, contrasting results under the European energy crisis with those from previously relatively stable market conditions. Methodologically, we show that the standard wind-based IV approach, which instruments prices with day-ahead wind generation forecasts, can be biased in residential settings with electric heating, because local wind conditions directly shift electricity demand through heating-related channels. Controlling for hourly local wind speeds provides a simple correction that preserves a strong first stage and reduces IV price coefficients by about 70 percent before the crisis and about 40 percent during the crisis. Yet, elasticities remain significant at -0.020 and -0.041, respectively. The direct wind effect on demand is economically meaningful: a 1 m/s increase in local wind speed raises hourly consumption by about 1 percent, comparable to the demand response induced by a 25–30 €/MWh price increase. Translating the elasticities into bill impacts yields mean annual per-household savings from short-run demand response of about €15.57 before the crisis and about €104.27 during the crisis, indicating moderate savings relative to total annual electricity expenditures.

Keywords: real-time pricing; electricity demand elasticity; instrumental variables (search for similar items in EconPapers)
JEL-codes: C26 Q41 (search for similar items in EconPapers)
Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_12617

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