Exploring households' responsiveness to energy price changes using microdata

How households respond to energy prices is central to understanding the impact of a range of energy policies. Many empirical models and applied research rely upon outdated or generic energy price elasticities of demand, with little attention paid to whether these elasticities are the most appropriate. For example, it is typically assumed that the relevant price for the calculation of these elasticities of demand is the contemporaneous price but, except consumers on pre-payment or 'smart meters', consumers do not observe electricity prices contemporaneously. As this paper shows, what one assumes about the reference price, matters empirically. Furthermore, there are good reasons to think that households of different incomes might respond differently to changing energy prices. This matters given the prominence of price as an instrument of energy policy and the need to understand distributional impacts. This paper explores these issues using a QUAIDS model and data from the UK Living Cost and Food survey. We show that different reference prices produce different elasticity estimates, and that there are important differences in how households respond to energy prices across the income distribution. These results have important implications for understanding the impact of energy prices on households and the environment.