The time-varying elasticity of South African electricity demand: 1980 - 2018

Working Paper 839

Abstract

This study estimates the price and income elasticity coefficients of domestic South African electricity demand for the period 1980 to 2018, considering both the aggregate economy as well as the mining sector in isolation. South African electricity prices were falling in real terms between 1983-2005. It then increased sharply in response to substantial tari§ increases between 2008-2011. A time-varying parameter model with the Kalman filter is applied to estimate the evolution of the elasticities over time. This allows the analysis to distinguish between the two regimes of decreasing and increasing real electricity prices, and evaluate the evolution of demand elasticities accordingly. The main result, consistent with existing South African literature, is that electricity consumption was unresponsive to price changes in the period of falling real electricity prices up to 2005. However, when real prices started increasing, the price elasticity coefficient increased markedly in absolute terms. This indicates that price sensitivity is notably higher when real prices are increasing. A secondary result is that electricity consumption in the mining sector, due to the inertial nature of mining operations, is much less responsive to price changes.