Electricity Prices, Income and Residential Electricity Consumption

In recent years, aiming to reduce the Greenhouse Gas pollution and promote energy efficiency and conservation among consumers’ energy use, price policies and price changes derived from environmental regulations have played a more important role. In this paper, using the most recent annual state-level panel data for 48 states, I estimate a dynamic partial adjustment model for electricity demand elasticities on price and income in the residential sector. My analysis reveals that in the short run, one unit price increase will only lead to 0.142 unit of reduction in electricity use after controlling for the endogeneity of electricity price. Thus, raising the energy price in the short run will not give consumers much incentive to adjust their appliances and make energy conservation investments to reduce electricity use. However, in the long run, one unit price increase will lead to almost one unit consumption reduction when the endogeneity of electricity price is controlled. Therefore, in the long run, facing the higher electricity price induced from regulation policies, consumers are more likely to adjust their stock of appliances and make energy efficiency investments, which lowers their electricity consumption. In addition, we find new evidence that states of relatively higher income levels are more price elastic than states of relatively lower income levels in both the short run and long run. Thus, for states of higher per capita GDP, raising the electricity price may be more effective to ensure a cut in consumption. JEL Classification: L52, Q41, Q48, Q5