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

Arbeitspapier

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.

Angaben zum Objekt

• Sprache: Englisch

Verweise und Beziehungen

• Erschienen in: http://hdl.handle.net/10419/272048

Klassifikation und Themen

• Klassifikation: Wirtschaft ; Energy: Demand and Supply; Prices ; Market Design
• Thema: Electricity markets ; price elasticity ; demand response ; instrumental variables

Beteiligte, Orts- und Zeitangaben

• Ereignis: Geistige Schöpfung
• (wer): Hirth, Lion ; Khanna, Tarun ; Ruhnau, Oliver
• Ereignis: Veröffentlichung
• (wer): ZBW - Leibniz Information Centre for Economics
• (wo): Kiel, Hamburg
• (wann): 2022

Weitere Informationen

• Handle: http://hdl.handle.net/10419/249570
• Letzte Aktualisierung: 10.03.2025, 11:42 MEZ