Revisiting Energy Demand Elasticity: The Power of Regime Switch
(2026) , 39 pages
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- Abstract
- This paper estimates residential electricity and gas price elasticities during the recent energy crisis, a period of exceptionally large price increases, using VAT-inclusive prices that reflect both market dynamics and policy-induced variation. We compare a standard constant-elasticity (log–log) specification with two regime-switching approaches: a structural break model distinguishingpre- and post-crisis elasticities, and a threshold model allowing elasticities to vary with the price level. While widely used, constant-elasticity models may poorly approximate demand under large price changes; in this context, regime-switching specifications provide complementary insights into how consumer responses vary across price regimes. Our results reveal distinct patterns across markets: for electricity, elasticity is lower in high-price periods than in low-price regimes, whereas for gas, only high-price periods induce significant reductions in consumption.
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Citations
Hindriks, J., Serse, V., & Paré, L. (2026). Revisiting Energy Demand Elasticity: The Power of Regime Switch (LIDAM Discussion Paper CORE 2026/06). https://hdl.handle.net/2078.5/275758