Estimation of the demand for electricity

The residential consumer of electricity is often faced with a price schedule, where the price per kWh differs according to the amountof electricity consumed. 1 1In this study, the relations between the price per kWh are not considered as a function of the time-of-use(TOU). The determination of TOU rates and the costs and benefits of TOU pricing are considered, for example, in studies which appeared in the Annals of Journal of Econometricsedited by Lawrence, Aigner (1979) and Aigner (1984).View all notesInstead of a single price per kWh, a price schedule exists, from which electricity is purchased in blocks at a decreasing marginal price. In a econometric demand analysis of household electricity consumption, one of the main questions is concerned with the price varible to be chosen. Should it be the marginal price, the average price, or perhaps both price varibles?In this study, residential demand functions for electricity are estimated employing different price variables. In demand functions employing both average price and marginal price the coefficients on average price are ‘right’; the negative signs reflect the expected inverse relationships between the quality of electricity demanded and the average price. On the other hand, nonsignificant but positive signs on marginal price are obtained. This result contradicts the findings of Roth (1981), who found a positive coefficient on average price and a negative coefficient on marginal price.Evidence is given for the inclusion of the average price as the only price variable in the demand function for electricity