State-Level Heterogeneity in the Price Elasticity of Demand for Residential Electricity

Abstract

Affordable, reliable electricity is essential for productive, healthy and thriving communities. Achieving this goal at least partly requires understanding the dynamic relationship between electricity prices and consumer demand is critical for utilities, regulators, and governments seeking to deliver affordable, reliable, and efficient energy. This paper presents updated estimates of a standard measure of price responsiveness in the US residential electricity market—price elasticity of demand for electricity (PEDE)—and explores how it varies across states. The paper finds that residential electricity demand is relatively inelastic on average: a 10% price increase is associated with only a 1.3% decrease in consumption. However, there is substantial variation in the PEDE across states, even among states in the same region or electric power market. This variation suggests that differences in state-level policy decisions, such as the presence or absence of retail choice, alternative rate structures, and the degree of price transparency, may also shape estimates of the PEDE. The authors find that recognizing and understanding the variation in price responsiveness across the country is crucial for effective rate design, targeted energy programs, and market regulation to improve affordability and efficiency in residential electricity markets.