The Price of Power: A quantitative study of price elasticity of demand during high electricity prices in Southern Sweden

Abstract

Unprecedentedly high electricity prices became a pressing issue for consumers in 2021-2022, causing political debate and shedding light on the hourly electricity prices. Out of the four Swedish electricity areas created to facilitate an effective electricity market, this thesis will focus on SE3 and SE4 in the South of Sweden, which experienced the highest prices in 2021-2022. The relatively low-price period of 2019-2020 is compared to the relatively high-price period of 2021-2022 in order to capture potential effects of persistent high prices on price elasticity of demand in the medium- to long-run. An ordinary least squares method was firstly used, estimating positive elasticities not in line with economic theory. Using a two-stage least squares method, with wind speed as an instrument variable for the day-ahead electricity spot price, the price elasticity of demand estimates are higher in 2019-2020 compared to 2021-2022, with a decrease in price elasticity between 41 and 51 percent. Results also show regional variability, with SE4 having a consistently higher price elasticity and showing greater reduction in elasticity in the second period compared to SE3. The results indicate a negative effect of persistent high prices on medium- to long-run price elasticity of demand, with some regional variability. Less medium- to long-term adjustments in relation to new price levels and factors relating to expected economic compensation are discussed as possible reasons for the overall decreasing effect of high electricity prices. Regional differences in price levels are discussed as a factor influencing regional variability in the results.