Demand flexibility and price elasticity: an analysis of the intra-day price elasticity of demand

Energy demand flexibility is widely considered a key part of the net-zero ambitions. However, many questions remain in regard to both the amount of flexibility available, and the most effective ways to harness said flexibility. Price-based incentives have been the go-to solution thus far for attempting to harness demand flexibility; the underlying assumption being that the price is the main factor at play when it comes to deciding whether or not to consume energy. In practice, however, what is observed is a large variability in price elasticity, or the responsiveness to time-varying energy rates. This variability depends on factors such as the on-peak to off-peak price ratios, uptake of technologies, and the wider context. It is observed not only across the consumer base but also throughout the day, as energy demand patterns are directly linked to broader activity patterns that dictate both the timing and intensity of energy demand. Understanding this intra-day variability in price elasticity is key to developing more effective demand flexibility interventions. However, to date, research investigating intra-day price elasticity remains limited. In this paper we present the preliminary results of the process of adapting an econometric model, originally developed to link energy wholesale prices to demand patterns, to a more targeted study of the intra-day price elasticity based on retail prices; that is, the prices actually experienced by end-users. The primary advantage of this model is that it provides a simple and straightforward way of assessing the extent to which price elasticity exhibits variation throughout the day. Moreover, the method proposed here can just as easily be applied to any other appropriate data set containing both fixed electricity tariffs - which do not vary based on the time of the day- as well as spot prices - where hourly rates change hourly. The analysis presented in this paper is carried out on a dataset collected as part of a Norwegian study from 2023 to understand households’ responses to the changes in energy prices experienced during the recent energy crisis experienced in Europe. Unpacking the intra-day variability of the price elasticity of energy demand is critical, as the extent to which households are either able or willing to respond to price signals is heavily influenced by the time of day and broader daily routines. Therefore, it is important to understand whether the periods where households are more prone to respond to such stimuli overlap with the periods where flexibility interventions are needed the most. Effective policy-making relies on this kind of information. Placing consumers’ demand patterns at the centre of policy-making debates increases the likelihood of implementing policies that are both effective and widely accepted. The paper concludes that intra-day price elasticity is key to developing demand flexibility interventions which reflect the timing of people’s activities.