Could be electricity considered as an inelastic good?

I am interested in the electricity delivered to final consumers in member countries of Nordpool Spot (Norway, Sweden, Finland, Denmark, Estonia, Latvia and Lithuania). I found that market prices in Nordpool Spot is not correlated with electricity consumption, therefore I explain this by considering, in this case, electricity as an inelastic good.

Is this reasoning correct?


It is. And it is not.

Electricity markets are generally not set up for the demand-side to do much active participation at all. So the short-run demand curve as seen in, for example, Nordpool Spot, is almost perfectly inelastic. Not quite, because there are some large industrial demands that exhibit some elasticity, and are exposed to the spot market. But a very large chunk of demand isn't exposed to the spot market at all; and a lot of the demand that is exposed, is highly inelastic - particularly to half-hour-by-half-hour changes.

That tells us a lot about the structure of the markets, and only a little about the actual underlying demand curve.

Until there's a lot of demand-side response (DSR), we've only got stated-preference studies and DSR pilots to go on, to estimate what the demand curve would look like in a well-functioning market: the evidence we have (e.g. from the Olympic Peninsula study), suggests there's quite a lot of potential demand elasticity out there, just waiting to be harnessed. Note that when short-run demand elasticity has been observed, it manifests in two ways: some demand will move between half-hours that aren't too far apart, when the price differentials incentivise it. Some other demand will just vanish altogether when prices rise.

If you want to try to distinguish the elasticity signal from all the noise in the existing market, then you need to take demand and prices for a particular half-hour slot on Tuesdays-Thursdays in one particular season across several years; and look at how weather-adjusted demand varies with price, while adjusting for any long-term trends.

  • $\begingroup$ Thank you very much EnergyNumbers! You mentioned in the answer that there is the possibility of distinguish the elasticity signal from all the noise in the existing market, but I do not understand the procedure to follow. Could you indicate to me some statistic/econometric techniques able to do that? I am new to energy finance, any additional help would be greatly appreciated. $\endgroup$ Jan 21 '16 at 18:41
  • $\begingroup$ @masterdavid if I were you, I'd start with a literature search for journal papers on the elasticity of spot-market electricity demand, and have a look at what other techniques people are using. The question you're asking is something I'd probably propose as a research question for a Masters' thesis: - it's not a small question. $\endgroup$
    – 410 gone
    Jan 21 '16 at 19:24
  • $\begingroup$ Yes, indeed I would like to include a part about the elasticity of spot-market elasticity demand in my Masters' Thesis. Thanks for the clarification. $\endgroup$ Jan 21 '16 at 20:59
  • $\begingroup$ @masterdavid so, two years later, looking back - how did the Masters go? Did you make progress on this particular question of elasticity? $\endgroup$
    – 410 gone
    Feb 28 '18 at 10:28
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    $\begingroup$ I really appreciated your help! My Masters went very well, I got the maximum score acceptable for my university. About the question whether electricity market is inelastic or not, from the slides of my discussion "(There is) a low price elasticity of demand in NordPool Spot, which makes prices insensitive to weather fluctuations." Those were my findings. I didn't analyze more deeply elasticity in electricity markets, since I found work in a completely different field, avoding me to have chances to study energy markets, though I keep a strong passion about them. Thank you. $\endgroup$ Mar 11 '18 at 16:31

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