The Price Elasticity of Electricity Demand in the United States A Three-Dimensional Analysis

• Published in: The Energy journal (Cambridge, Mass.) Vol. 39; no. 2; pp. 123 - 146
• Main Authors: Burke, Paul J., Abayasekara, Ashani
• Format: Journal Article
• Language: English
• Published: Los Angeles, CA Energy Economics Education Foundation 01-03-2018; SAGE Publications; Sage Publications Ltd. (UK); International Association for Energy Economics
• Subjects: Analysis; Clustering; Datasets; Demand analysis; Dimensional analysis; Elasticity (Economics); Elasticity of demand; Electric power; Electric power demand; Electricity; Estimates; Industrial areas; Mathematical analysis; Natural gas; Nuclear power plants; Price elasticity; Prices and rates; Supply and demand; Three dimensional analysis; United States; United States > US; electricity demand; panel; price elasticity; United States
• ISSN: 0195-6574; 1944-9089
• DOI: 10.5547/01956574.39.2.pbur

In this paper we employ a dataset of three dimensions—state, sector, and year—to estimate the short- and long-run price elasticities of state-level electricity demand in the United States. Our sample covers the period 2003–2015. We contribute to the literature by employing instrumental variable estimation approaches, using the between estimator, and pursuing panel specifications that enable us to control for multiple dimensions of fixed effects. We conclude that state-level electricity demand is very price inelastic in the short run, with a same-year elasticity of −0.1. The long-run elasticity is near −1, larger than often believed. Among the sectors, it is industry that has the largest long-run price elasticity of demand. This appears to in part be due to electricity-intensive industrial activities clustering in low-price states.