The time-varying elasticity of South African electricity demand

Abstract

This paper estimates the price and income elasticity coefficients of domestic electricity demand for the period 1980 to 2018 in South Africa. South African electricity prices were falling in real terms between 1983 and 2005. It then increased sharply in response to substantial tariff increases between 2008 and 2011. A time-varying parameter model with the Kalman filter is applied to estimate the evolution of the elasticities over time. This allows the analysis to distinguish between the two regimes of decreasing and increasing real electricity prices and evaluate the evolution of demand elasticities accordingly. The main result, consistent with existing South African literature, is that electricity consumption was unresponsive to price changes in the period of falling real electricity prices up to 2005. However, when real prices started increasing, the price elasticity coefficient increased markedly in absolute terms. The key result that policymakers should take note of is that aggregate price sensitivity is notably higher when real prices are increasing. While price elasticity estimates remain lower than unity (i.e. relatively inelastic), further price increases may incentivise consumers to substitute into alternative sources of energy. This result is echoed by findings from the comparable international literature.