Responsiveness to energy price changes when salience is high: Residential natural gas demand in Ukraine
Abstract
Despite its importance for policy purposes, evidence about the price elasticity of natural gas demand in the residential sector is very limited and based on inference from situations with modest variation in prices. We focus on a locale and time when price changes were extreme and salient to consumers, namely Ukraine between 2013 and 2017.
We exploit the tariff reforms and detailed micro-level household consumption records to assess whether consumers adjust their consumption in response to the rate changes and estimate the price elasticity of the demand for natural gas. To isolate behavior, attention is restricted to those households that made no structural energy-efficiency upgrades to their homes, thus keeping the stock of gas-using capital fixed.
We find that households are capable of reducing consumption, even without installing insulation or making any other structural modifications to their homes. The price elasticity is about -0.16.
Wealthier households, people living in multifamily buildings, and heavy users have more inelastic demands. Households reduced consumption even when they received government assistance.
This, and the fact the demand is inelastic, especially for wealthier households, bode well for tariffs or energy tax schemes where wealthier households subsidize the consumption of the poorer ones.