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The (very) short-term price elasticity of German electricity demand

  • 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.

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Metadaten
Document Type:Working Paper
Language:English
Author(s):Lion HirthORCiD, Tarun KhannaORCiD, Oliver Ruhnau
Publication year:2022
Publishing Institution:Hertie School
Related URL:https://www.econstor.eu/handle/10419/249570
Release Date:2022/02/28
Tag:Centre for Sustainability; Demand response; Electricity markets; Instrumental variables; Price elasticity
Hertie School Research:Publications PhD Researchers
AY 21/22:AY 21/22
Licence of document (German):Metadaten / metadata
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