Elasticities of demand in the Swedish electricity market : A quantitative study of the price- and income elasticity of electricity demand of the four different price areas in Sweden

Abstract: The Swedish electricity market was divided into four different electricity price areas in 2011 which has led to regional differences in prices in Sweden in the recent years. The electricity prices have also started to rise considerably in the past years, which has led to questions around the subject taken a bigger place in the political debate. This master’s thesis investigates and compares the price and income elasticities in the four different electricity price area of Sweden using regional data from 2013-2020. The elasticities are measured using an ordinary least squares model (OLS) and a two-stage least squares model (2SLS) with an instrumental variable, we also compute a fixed effects model (FE) to estimate the demand elasticities of electricity for the whole country using regional effects. The results shows that there is a negative and small price elasticity and positive and small income elasticity in electricity areas SE1, SE3 and SE4. The estimated price elasticity was positive but insignificant in area SE2, while the income elasticity was negative and small. The FE-model estimations showed low price and income elasticities for Sweden.