Estimating income and price elasticities of residential electricity demand with Autometrics

Highlights: • Income and price elasticities of electricity demand are estimated via Autometrics. • Cointegration is found between residential electricity demand and its determinants. • For all countries electricity is a normal good and demand is price inelastic. • Policies that only increase price are likely to have limited impact on consumption. This paper estimates the income and price elasticities of the residential electricity demand for twelve major European countries using annual time series from 1975 to 2018. In the modelling exercise we adopt a novel econometric approach that features automatic model selection, saturation methods for detecting outliers and structural breaks, and the automatic model selection algorithm Autometrics. The selected specification for each country is an error correction model, from which it emerges a cointegrating relationship between electricity consumption, income, electricity price and climate variables, once that outliers and breaks are accounted for. The empirical results show that the estimated long-run income elasticities are less than one for all countries, and that the long-run price elasticities are in all cases less than one in absolute value. These results suggest that for European countries electricity is a normal good and that demand is price inelastic.