Consumer responsiveness in the Nordic electricity market: An empirical analysis for the 2019 – 2023 period
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School of Business |
Master's thesis
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Date
2024
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Mcode
Degree programme
Economics
Language
en
Pages
69+6
Series
Abstract
Understanding consumer responsiveness to price changes is a key task of economic research, since it is highly relevant for counterfactual analysis, welfare calculations and policy design. The most common measure of consumer responsiveness in economics is the price elasticity of demand. In this paper, I study the elasticity of demand in the Nordic wholesale electricity market for the period 2019-2023 with a special focus on the 2021-2023 energy crisis. Using a novel dataset and a model for demand that estimates the demand curve for every hour, I show that demand became more elastic at equilibrium as the crisis unravelled and this was driven by higher prices and increased share of responsive consumers. I explain the economic meaning of model parameters and explore their relationship with elasticity at equilibrium and at different parts of the demand curve. Additionally, I decompose the demand into different parts and study the behavior of each part separately. I find an asymmetric change of elasticity for different price levels. It was the higher part of the demand- the one that corresponds to high price levels- that became more elastic relative to its prior state during the crisis. A behavioral explanation of this phenomenon is that inattentive consumers reveal their true valuation of electricity as the crisis unravels and prices increase significantly. During normal price periods, inelastic consumers' bidding do not reflect their true valuation of electricity, since they expect to pay the lower expected equilibrium price.Description
Thesis advisor
Liski, MattiKeywords
demand elasticity, wholesale electricity, NordPool, energy crisis