Responses to Extreme Price Changes: Evidence from the Residential Demand for Natural Gas

We examine the response of residential customers to an extreme price change accompanied by a "notch" - namely that imposed by the government in the Republic of Georgia during the pandemic lockdown in the winter of 2020 and early 2021. As of November 2020, the government paid the gas bill directly to the utility, effectively making gas free, as long as consumption was below or exactly 200 m3/month. The policy was lifted at the end of February 2021. We use quasi-experimental causal methods based on a control group comprised of permanent residents of an area along the North-South pipeline, who receive gas for free (up to the generous allowance of 700 m3/month) every winter, while the treatment group is comprised of households living in areas with similar climates and similar population density who received gas for free only during the pandemic free gas months. The latter exhibit pronounced bunching of consumption just below or at 200 m3 during the pandemic free gas months, a pattern that was not present before and vanishes quickly thereafter. No such pattern is observed among the control group households. Controlling for the weather, the ATT of the policy is a 2-7% increase in gas consumption (in the treatment group compared to the control group). Back-of-the-envelope calculations suggest a price elasticity of demand of -6.5% to -11%.