Price and Income Elasticities of Hungarian Household Energy Demand: Implications for Energy Policy in the Context of the Energy Crisis

Abstract

The energy crisis that began in the second half of 2021, exacerbated by the Russian-Ukrainian war, created unexpected difficulty for European Union Member States in terms of shaping their energy policies. Hungary was one of the most vulnerable countries, whose economic development was fraught with severe risk due to the strong dependence on Russian energy sources and regulated energy prices for households, significantly slowing down the transition to green energy. The sharp change in energy prices due to the introduction of a price cap in 2013-2014 and the partial adjustment in 2022 draws attention to the situation of Hungarian energy demand. This study describes the absolute short-term price elasticities of Hungarian household natural gas and electricity demand and gas and electricity cross-price and income elasticities of the former for income deciles between 2010 and 2021 using the midpoint percentage method. The results show that electricity demand is more elastic than gas demand, implying that Hungarian household consumers are more responsive to changes in electricity prices than those of gas. In addition, low-income Hungarian households are more sensitive to changes in both of the latter than high-income households, while no consistent pattern is identified in the relationship between income and energy demand. Accordingly, the study recommends the implementation of a multi-tariff pricing strategy based on the energy burden of the income deciles. This should particularly target the first two deciles, which are the most vulnerable and sensitive to energy price changes.