Download PDF

We study the dynamics of residential electricity demand by exploiting a natural experiment that produced large and long-lasting price changes in over 250 Illinois communities. Using a flexible difference-in-differences matching approach, we estimate that the price elasticity of demand grows from −0.09 in the first six months to −0.27 two years later. We also estimate a more sophisticated model in which usage is a function of past and future prices, and we find similar elasticity patterns. Our findings highlight the importance of accounting for consumption dynamics when evaluating energy policy.