2023 Fiscal Year Annual Research Report
Electricity Pricing and Subsidy for Energy Conservation in Developing Country: Evidence from Natural Experiment
| Project/Area Number |
20K13498
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| Research Institution | Waseda University |
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Principal Investigator |
Dendup Ngawang 早稲田大学, 政治経済学術院, 講師(任期付) (00844549)
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| Project Period (FY) |
2020-04-01 – 2024-03-31
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| Keywords | electricity / nonlinear price / welfare / instrumental variables / difference-in-difference |
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| Outline of Annual Research Achievements |
This study examines the welfare effects of household responses to nonlinear electricity prices using monthly electricity consumption data. In October 2013, the government of Bhutan introduced a subsidy of free 100 kWh of electricity to rural households, while urban households were not eligible for the subsidy. Our data show that consumers bunch at 100 kWh after the subsidy, but we do not observe a similar pattern before the subsidy. First, we formally assess the excess bunching, and the results suggest that the number of observations just below 100 kWh after the subsidy is about twice as much as in the counterfactual scenario (i.e., the number of households in the absence of the subsidy). Similarly, following the literature, we examine whether households are responding to the marginal price or the average price, using predicted marginal and average prices as instruments in the first-stage regression. The results suggest that households respond to the marginal price and not the average price. Since we do not observe similar bunching at the 100 kWh consumption threshold where the marginal price increases for urban households, the instrumental variable results likely capture the demand response of rural households. Additionally, in the current version of the manuscript, we estimate the matching difference-in-differences to estimate the effect of the subsidy on electricity consumption, using consumptions 12 months prior to the subsidy as matching covariates. Our difference-in-differences results suggest that the subsidy increased consumption by about 3-7 percent.
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