A New Look at Residential Electricity Demand Using Household Expenditure Data

The recent push for a federal energy policy that could substantially change electricity prices in the U.S. highlights the need to obtain accurate residential electricity demand estimates. Many electricity demand estimates have been obtained based on the assumption that consumers optimize with respect to known marginal prices, but increasing empirical evidence suggests that consumers are more likely to respond to average prices. Under this assumption, this paper develops a new strategy based on GMM to estimate household electricity demand. Our approach allows a national-level demand estimation from publicly available expenditure data and utility-level consumption data, complementing studies that use individual billing data which are richer yet often proprietary. We estimate the price elasticity near -1, which is at the upper end (in magnitude) among the estimates from previous studies. We apply our elasticity estimates in a U.S. climate policy simulation to determine how these elasticity estimates alter consumption and price outcomes compared to the more conservative elasticity estimates commonly used in policy analysis.