Household demand for electricity: The role of market distortions and prices in competition policy

Highlights: • Highlights: role of market distortions and prices for competition policy. • Electricity subsidies play a major role in the residential demand for electricity. • Increasing prices to conserve energy are ineffective in the presence of subsidies. • Energy saving technologies are shown to be an important energy conservation tool. -- Abstract: This paper examines residential demand for electricity in Sri Lanka using survey data collected over a five-year period between 2011 and 2015. The study finds that the major determinants of demand for residential electricity are the result of price or market distortions (i.e. subsidies), socioeconomic variables and energy saving technology. The effects of these variables are particularly relevant to competition policy. Estimated elasticities with respect to average price, subsidies under marginal cost pricing, subsidies under average cost pricing and income are found to be −0.015, 0.021, 0.036 and 0.046 respectively. We find that demand for electricity is inelastic and is categorised as a normal good. However, elasticities with respect to subsidy variables are found to be higher than the price variable. This implies, that under an increasing block rate system any price change used as a policy measure to control electricity consumption will not be effective. This is because price changes could alter the subsidy received by the consumer and therefore reverse the objective of the price change. Further, results of this study find that price and elasticities with respect to subsidy variables are relatively higher for low income groups while income elasticity is relatively larger for high income groups.