The price elasticity of residential district heating demand: New evidence from a dynamic panel approach

• DOI: 10.1016/j.eneco.2022.106163
• Publication Date: 2022-06-30T01:38:54Z
• Authors: Gianluca Trotta; Anders Rhiger Hansen; Stephan Sommer
• Keywords: Dynamic panel data model; District heating; 13. Climate action; Denmark; Residential energy demand; 0202 electrical engineering, electronic engineering, information engineering; 1. No poverty; Price elasticity; 02 engineering and technology; Heterogeneity; 7. Clean energy

We estimate the price elasticity of residential district heating demand in Denmark using the Blundell–Bond two-step generalized method of moments (GMM) estimator and a sample of 152,913 observations covering the period of 2015 to 2019. Moreover, we analyze the heterogeneity in the response to district heating price increases among various household groups and investigate the distributional consequences of policies that increase the price of district heating. To this end, we measure the effects of a price increase on district heating bills, consumption, and emissions. We find a short-run price elasticity of −0.530 and a long-run price elasticity of −0.638. Higher consumption levels are associated with dwelling age, dwelling size, homeownership, income, number of household members, and whether households receive heating allowances. We find significant evidence that price elasticity varies across household groups: Low-income households, intensive consumers, single households, and households in older and smaller dwellings are more responsive to price changes than their respective counterparts. We also demonstrate that a 10% increase in the price of district heating would increase expenditures in high-income and low-income households by 7.18% and 1.16% (ceteris paribus), respectively. Our findings therefore have important implications for the evaluation of price policies aimed at reducing emissions and the distributional impacts of such measures.