The question of how consumers react to changes in price lies at the heart of much economic analysis but is rarely answered using real world data.
In a recent study for Ausgrid, we applied state-of-the-art econometric techniques to uncover exactly how electricity customers in Sydney altered their consumption when the prices affecting their electricity bills changed. This involved estimating the ‘price elasticity of demand’, an economic variable describing how customers’ demand is affected by prices.
Our analysis was performed in the context of Ausgrid’s tariff structure proposal to the Australian Economic Regulator (AER) and used to show that Ausgrid’s allocation of a particular portion of its costs minimised distortions and was in accordance with the National Electricity Rules.
Leveraging almost one billion data points drawn from Ausgrid’s billing systems as well as external data from myriad sources – for parameters such as historical weather and income – Adrian Kemp, Dale Yeats and Stuart Morrison derived detailed econometric models that focused on the price effects, absent other confounding factors that might affect electricity consumption.
In a first in the Australian energy sector, our study closely examined the different components that comprise a customer’s electricity bill, ie, peak and off-peak time-of-use charges, as well as fixed charges. This disclosed previously unseen patterns concerning the drivers of electricity consumption in Sydney.
We expect studies of this kind to become increasingly common, both to satisfy regulators, requesting more sophistication from service providers, as well as for businesses seeking to draw from their large data reserves to improve understanding of their customers.
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