Time-varying price elasticity of electricity demand

Jieyang Chong and Jacopo Torriti

OverviewThe ability to induce shifts in electricity load within a day may reduce costs for a number of reasons. Lowering daily peaks or managing foreseeable spikes in demand are useful for system security. Similarly, taking advantage of favourable weather conditions with respect to  eneration of renewable energy could also be achieved through successful load-shifting. One of the ways in which this outcome can be targetted is through the use of financial incentives. In designing a suitable monetary incentive or deterrent for consumption, knowledge of the expected demand response to an effective change in electricity price is key. In the context of intra-day shifting, understanding how the profile of price elasticity varies within a day is of particular relevance.

Estimation of intra-day patterns in price elasticity of electricity demand has received limited attention in the literature (Fan and Hyndman, 2011; Knaut and Paulus, 2016; Kulakov and Ziel, 2019; Chong, 2021) and has recently become topical in light of the gas shortage and soaring electricity prices in Europe. This study proposes a new econometric approach which introduces smoothness in the intra-day pattern of elasticity, and preserves this smoothness of elasticity at all times of the day. Smoothness in elasticities is argued in the paper to be characteristic of data which captures aggregated consumption behaviour (e.g. whole population, the residential sector, all office buildings in a city) as opposed to individual or household-level data. Since time of day is measured in a cyclical manner, it follows that if elasticity is smooth, it must be so in a cyclical manner. In other words, even though each day arbitrarily starts at the first measurable moment after midnight, when elasticity between midnight and this time is continuous, it can be considered to be “smooth everywhere”.

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