The Long-Run Dynamics of Electricity Demand: Evidence from Municipal Aggregation

by Alexander MacKay, Tatyana Deryugina, and Julian Reif

Overview — This study provides the first quasi-experimental estimate of the long-run elasticity (responsiveness) of residential electricity demand, and finds that it is about double the short-run elasticity. Our findings highlight the importance of accounting for consumption dynamics when evaluating energy policy.

Author Abstract

Economic theory suggests that demand is more elastic in the long run relative to the short run, but evidence on the empirical relevance of this phenomenon is scarce. We study the dynamics of residential electricity demand by exploiting price variation arising from a natural experiment: the introduction of an Illinois policy that enabled communities to select electricity suppliers on behalf of their residents. Using a flexible difference-in-differences matching approach, we estimate a one-year price elasticity of -0.16 and three-year elasticity of -0.27. We also present evidence that consumers increased usage ahead of these announced price changes. Finally, we project that the price elasticity converges to a value between -0.30 and -0.35 after ten years. Our findings highlight the importance of accounting for consumption dynamics when evaluating energy policy.