Estimating industrial and residential electricity demand in Turkey: A time varying parameter approach

Abstract

This paper estimates the price and income elasticity of industrial and residential electricity demand in Turkey for 1960-2008 period. Time varying parameters model based on Kalman filter is employed. The results show that the income and price elasticities of industrial and residential electricity demand are lower than unity. The income elasticity of demand has a positive sign and it is statistically significant which is 0.979 and 0.955 for industrial and residential electricity demand, respectively. Thus, an increase in per capita electricity consumption is less than increase in per capita income. Moreover, the estimates of price elasticity are very inelastic for both residential and industrial electricity demand. The price elasticity of industrial electricity demand is -0.014 and price elasticity of residential electricity demand is -0.0223. Therefore, the price increase will not discourage residential and industrial electricity demand and consumers will show little response to electricity price variations because electricity is a necessary good.