Untangling electricity demand elasticities: Insights from heterogeneous household groups in Pakistan

Abstract

This study presents a comprehensive analysis of evaluating household energy demand's income and price elasticities by employing micro data from eight independent household surveys spanning 2001–2019. To achieve this objective, a pseudo-panel is employed; therefore, 1200 cohorts are constructed based on various variables such as region, climatic zone, months, and expenditure deciles. The findings reveal a relatively higher own price elasticity, illustrating a decline in household electricity usage with increased electricity prices. Therefore, any policy that tends to increase electricity prices would cut back household electricity usage. The findings of cross-price elasticities demonstrate that electricity is a substitute for gas and firewood in Pakistan. Moreover, quantile regression was utilized to explore the relationship between energy consumption and predictors. The results indicate that elasticities vary significantly at different levels of electricity usage. In addition, electricity elasticities across different heterogeneous groups are also estimated, their results indicating that low-income groups are more price elastic than the high-income group. Furthermore, electricity demand in rural areas is more price elastic than in urban areas. Therefore, policies induced in the energy sector might cause significant redistribution effects. Therefore, the findings of this study provide valuable insights of the determinant of household electricity usage in Pakistan and emphasize the importance of incorporating income and price elasticities in formulating energy policy. By considering households' heterogeneous characteristics, policymakers can formulate equitable and efficient policies, ensuring that the benefits of such policies are distributed fairly for all segments of society.