A new approach to modeling the effects of temperature fluctuations on monthly electricity demand

Abstract

We propose a novel approach to measure and analyze the short-run effect of temperature on monthly sectoral electricity demand. This effect is specified as a function of the density of temperatures observed at a high frequency with a functional coefficient, in contrast to conventional methods using a function of monthly heating and cooling degree days. Our approach also allows non-climate variables to influence the short-run demand response to temperature changes. Our methodology is demonstrated using Korean electricity demand data for residential and commercial sectors. In the residential sector, we do not find evidence that the non-climate variables affect the demand response to temperature. In contrast, we show conclusive evidence that the non-climate variables influence the demand response in the commercial sector. In particular, commercial consumers are less responsive to cold temperatures when controlling for the electricity price relative to city gas. They are more responsive to the price when temperatures are cold. The estimated effect of the time trend suggests that seasonality of commercial demand has increased in the winter but decreased in the summer.