CNZ x Cramton Associates x University of Cologne x University of Maryland
Electricity markets balance supply and demand with price. Historically, this price response has come almost entirely from supply. However, when much of supply is intermittent or inflexible, price responsive demand becomes essential for reliability and resiliency.
We collaborated with American economist Professor Peter Cramton and his market design research team at the University of Cologne and the University of Maryland to explore the price elasticity of demand of UK households, measuring how responsive consumers were to price between July 2020 to July 2021 with half-hourly individual-household data.
Our sample included customers with a dynamic rate that tracks wholesale cost, as well as flat-rate customers used to control for weather and other factors. We found that a one percent increase in price reduces demand by 0.26 percent. This elasticity is larger for consumers owning low-carbon technologies. This price response is sufficient to maintain system balance in extreme events, even when most consumers are unresponsive. Regulators can encourage price responsive demand through retail choice and subsidise enabling technologies. Regulators can protect consumers with mandated hedging in dynamic plans. Low-income households benefit most from such policies.