Price and Income Elasticity of Residential Electricity Consumption in Khorezm

Abstract

AbstractPrice or income elasticity of demand is the percentage change in electricity demand resulting from a one-percent change in its price or income. Information on price and income elasticity of demand for electricity is crucial for formulating appropriate reform policies. In Central Asian economies with a less-developed industrial sector, the share of residential electricity consumption is relatively high. Residential electricity consumers are known to be more flexible with respect to price- and income-related changes and to adapt to these changes relatively fast. Knowledge about price and income elasticity of electricity demand is crucial for implementing, for instance, tariff reforms. The aim of this study is to estimate the short-term price and income elasticity of residential electricity demand using panel data based on time series of 6 years for the 12 districts of the Khorezm region, Uzbekistan, under the condition of data limitations. Using a unique dataset, the study attempts to identify the best proxy for the unobservable income variable. As for the price of electricity, nominal and real electricity prices tended to be growing between 2002–2007 from 7.0 Uzbek Soums (UZS) to 42.3 UZS (nominal), and 7.0 to 33.5 UZS (real), respectively, while the US$ equivalent of the nominal price decreased from 6.23 US cents in 2002 to 3.35 US cents in 2007. Residential electricity demand is relatively price inelastic (between 0 and −1) in the short run. The study further tests the validity of indicators such as industrialization and growth in residential area as alternative measures of economic development that cannot be captured by income. The results suggest that the income elasticities have a low value. The industrialization rate variable has a high value of demand determination. The growth in residential area used in this study as explanatory variable requires more precise data to be conclusive.KeywordsElectricity demandShort-run elasticityPanel dataTransition economiesCentral Asia