The Impact of Government Subsidies on Electricity Demand and Consumption for the Urban and Rural Households in Iran (A Systemic Solution)

The continuous growth of electricity consumption in Iran, due to the low and unreasonable prices, has created immense pressure on the national network of supplying electricity to meet the ever-increasing demand. The realistic and economically justifiable pricing of electricity has, therefore, become an urgent issue for managing supply and demand. The residential electricity consumption in the country is one of the main sources of such demand increase. The present study focuses on the impacts of government subsidies on electricity demand and consumption for the urban and rural households in Iran. Data used for this study include price index, urban and rural household expenditures, provided by the Iranian Center for Statistics, Central Bank of Iran during the period 1991-2012. The study utilizes Almost Ideal Demand System (AIDS) and Seemingly Unrelated Regression (SUR) estimation methods for data analyses. The results show that electricity is an essential good for both urban and rural households, and as such the demand and consumption levels for both urban and rural households in the country have very little (less than one) elasticity to prices. The conclusion is that the demand levels for residential electricity consumption are not meaningfully reduced by the price increase for customers created by elimination or reductions of governmental subsidies for electricity. Therefore, pricing policies alone would not be effective to reduce residential electricity consumption in the country, and there is a need for additional and supplemental policies