The Long-Run Dynamics of Electricity Demand: Evidence From Municipal Aggregation

Abstract

We study the dynamics of residential electricity demand by exploiting a natural experiment that produced large and long-lasting price changes in over 250 Illinois communities. Using a flexible difference-in-difference matching approach, we estimate that the price elasticity of demand grows from − 0.09 in the first six months to − 0.27 two years later. We find similar results with a dynamic model in which usage is a function of past and future prices. Our findings highlight the importance of accounting for consumption dynamics when evaluating energy policy. (JEL L94, L98, Q41, Q48)