The evolution of price elasticity of electricity demand in South Africa: A Kalman filter application

In South Africa, the electricity mismatch of supply and demand has been of major concern. Additional to past problems, the 2008 electricity crisis made the solution crucial after its damaging consequences to the economy. The disagreement on the need and consequences of the continuous electricity price hikes worsens the situation.To contribute to the recent electricity debate, this paper proposes a time-varying price elasticity of demand for electricity; the sensitivity of electricity consumption to price fluctuations changes throughout the years. The main purpose of this study is the estimation of the price elasticity of electricity in South Africa during the period 1980–2005 by employing an advanced econometric technique, the Kalman filter.Apart from the decreasing effect of electricity prices to consumption (−71.8% in the 1990s and −94.5% in the 2000s in average), our results conclude to an important finding: the higher the prices (for example in the 1980s) the higher the sensitivity of consumers to price fluctuations.Thus, further increases of the electricity prices may lead to changes in the behaviour of electricity consumers, focusing their efforts on improving their efficiency levels by introducing demand-side management techniques or even turning to other sources of – cheaper – energy.

► The price elasticity of South Africa's electricity demand (1980–2005) is examined.
► The Kalman filter methodology is used to show elasticity changes over time.
► Decreasing effect of electricity prices to consumption over the years is found.
► The higher the prices of electricity were, the higher the sensitivity of consumption.
► If electricity prices increase, consumers will choose to consume more efficiently.