Price and income elasticity of natural gas demand in Europe and the effects of lockdowns due to Covid-19

Abstract

We analyse a panel of 25 European-countries to provide novel estimates of monthly own-price, cross-price, and income elasticities of natural-gas-demand from 2005 to 2020. We find that: first, there is an European Standard Behaviour (ESB) with a strong-seasonal component. Second, we identify three different patterns from the ESB: 1) France, Denmark and Estonia present slightly positive elasticities in the short-run and a lack of sensitivity to own-price variations in the long-run –we argue this phenomenon is due to a higher weight of heating demand-. 2) Latvia presents a lower sensitivity to own-price variations than the ESB -we argue due to the role of natural gas as a unique backup technology in the power sector-. 3) In Portugal, natural gas showed the highest own-price elasticities – we argue that natural gas is used mainly in the power sector with substitutive technologies-. Finally, we find that Covid-19-lockdowns highly impacted natural-gas-demand, confirming the “double-heating-effect”.