11. Estimating the price (in)elasticity of off-grid electricity demand

Müller, M.F. , Thompson, S.E. , Gadgil A.J, (2018), Development Engineering, , doi: 10.1016/j.deveng.2017.12.001

Community-scale power infrastructure may be the only electrification option for tens of millions households that remain out of reach from centralized power grids. The responsiveness of household electricity demand to price is a crucial design input for off-grid systems. While the price elasticity of electricity demand of grid-connected consumers has been abundantly studied, few studies focus on off-grid communities where substantial econometric challenges arise, including the absence of metered consumption data and electricity prices that are simultaneously determined by cost and demand considerations. This study attempts to address these challenges for the case of off-grid micro hydropower consumers. It makes two core contributions: First, we propose the surface area of the contributing hydrologic catchment as a new instrumental variable to estimate elasticity using a cross sectional dataset of existing micro hydropower infrastructure. Second, we provide a first price-elasticity estimate (−0.15) for off-grid electricity demand in Nepal. We surmise that the small (in absolute value) elasticity value found in this study arises from the low levels of consumption observed off-the-grid. We use a Monte Carlo analysis to show that failing to account for this disparity can lead to substantial financial losses caused by suboptimal power infrastructure design.