The (very) short-term price elasticity of German electricity demand
Lion Hirth,
Tarun Khanna and
Oliver Ruhnau
EconStor Preprints from ZBW - Leibniz Information Centre for Economics
Abstract:
Electricity is a peculiar economic good, the most important reason being that it needs to be supplied at the very moment of consumption. As a result, wholesale electricity prices fluctuate widely at hourly or sub-hourly time scales, regularly reaching multiples of their average, and even turn negative. This paper examines whether the demand for electricity responds to such price variations in the very short term. To solve the classical identification problem when estimating a demand curve, we use weather-driven wind energy generation as an instrument. Our robustness checks confirm that wind energy is indeed a strong and valid instrument. Using data from Germany, we estimate that a 1 €/MWh increase in the wholesale electricity price causes the aggregate electricity demand to decline by 67–80 MW or 0.12–0.14%, contradicting the conventional wisdom that electricity demand is highly price-inelastic. These estimates are statistically significant and robust across model specifications, estimators, and sensitivity analyses. At average price and demand, our estimates correspond to a price elasticity of demand of about –0.05. Comparing situations with high and low wind energy (5–95th percentile), we estimate that prices vary by 26 €/MWh, and the corresponding demand response to wholesale electricity prices is about 2 GW, or 2.6% of peak load. Our analysis suggests that the demand response in Germany can be attributed primarily to industrial consumers.
Keywords: Electricity markets; price elasticity; demand response; instrumental variables (search for similar items in EconPapers)
JEL-codes: D47 Q41 (search for similar items in EconPapers)
Date: 2022
New Economics Papers: this item is included in nep-ene and nep-reg
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Citations: View citations in EconPapers (2)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:esprep:249570
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