Analyzing the consequences of postponing electricity subsidy reforms in Iran: A retrospective study

Iran, as an oil-revenue–based economy, remains one of the world's largest providers of fossil fuel subsidies, with the electricity sector receiving the greatest share. This sustained support has driven per-capita electricity consumption to grow by 5 % annually, significantly above the global average. To assess the economic and behavioral effects of delayed subsidy reforms on consumption patterns and demand elasticities, a state-space model was applied across five phased scenarios spanning 1985–2023. Results reveal pronounced temporal variation in both price and income elasticities: subsidies have dampened consumer responsiveness and entrenched reliance on low-cost energy. All reform scenarios demonstrate a positive relationship between tariff increases and price elasticity, underscoring the necessity of gradual, stepwise subsidy removal. Delays in reform not only heighten the government's fiscal burden but also weaken price elasticities and undermine the effectiveness of subsequent measures. Accordingly, we recommend a five-year, phased reform plan—with targeted support measures for vulnerable households—to steer electricity consumption toward greater efficiency and equity. • Iran leads in providing fossil fuel subsidies, driving a 5 % annual growth in electricity consumption. • Price and income elasticities of electricity demand have declined over time. • Delays in subsidy reforms reduce price elasticity and policy effectiveness. • Gradual subsidy removal can increase price elasticity, leading to reduced electricity consumption. • Phased reforms with targeted support ensure equitable and efficient consumption.