Abstract
A price reform in Turkey increased the residential electricity tariff by more than 50 percent in 2008. The reform, aimed at encouraging energy efficiency and private investment, sparked considerable policy debate about its potential impact on household welfare. This paper estimates a short-run residential electricity demand function to evaluate the distributional impact of the tariff increase. The analysis allows heterogeneity in households’ price sensitivity and the model is estimated using a nationally representative sample of 8,572 Turkish households. The results suggest that rich households in Turkey are three times as responsive in adjusting consumption to price changes as poor households are. In addition, the welfare loss of the poorest income quintile—measured by the change in consumer surplus as a percentage of income—is 2.9 times that of the wealthiest.
Highlights
With energy security and climate change becoming growing concerns, policy makers have increasingly come to realize that energy prices will have to rise in order to reflect the full cost of consumption
Parameter estimates are largely insensitive to the choice of model. Both the Wald and likelihood ratio tests fail to reject the null hypothesis that the correlation coefficient (ρ) equals zero, suggesting that the selection process can be ignored conditional on observable household characteristics
This paper analyzes the distributional impact of the 2008 energy price reform in Turkey which increased the residential electricity tariff by more than 50 percent over the course of one
Summary
With energy security and climate change becoming growing concerns, policy makers have increasingly come to realize that energy prices will have to rise in order to reflect the full cost of consumption. In developing countries, this often involves removing subsidies to bring energy prices closer to market rates; in the developed world, the goal is to internalize environmental costs in energy prices. Price reform is a key part of the electricity market reform launched in Turkey in 2001 It is considered essential for encouraging energy efficiency, attracting private investment, and improving the financial position of the state-owned electricity utilities. The reform is aimed at establishing a competitive electricity market so as to increase private investment, improve energy efficiency, and strengthen Turkey’s energy security. In 2006 a competitive wholesale electricity market was introduced, and in 2008 the Government started to privatize the distribution company
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