Electricity Pricing and Subsidy for Energy Conservation in Developing Country: Evidence from Natural Experiment

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This research examines the households response to nonlinear electricity price using monthly electricity consumption data from Bhutan. In October 2013, government of Bhutan introduced free 100 kWh of electricity subsidy to rural households (while urban households are not eligible for the subsidy). Result show that both rural and urban households do not bunch at 100 kWh before subsidy. After the subsidy, rural households bunch at 100 kWh (i.e. subsidy threshold. Rural households consuming more than 100 kWh of electricity are subject to standard marginal price for the consumption exceeding 100 kWh). Bunching results for rural households suggests that number of observation just below 100 kWh after the subsidy is about two times more than in the counterfactual (i.e. number of households in absence of subsidy) while we do not find such response from urban households. Similarly, following literature, we examine whether households are responding to marginal price or average price using predicted marginal and average price as instrument in the first stage regression. The results suggest households responds to marginal price and not average price. Since we do not observe similar bunching at 100 kWh consumption threshold where marginal price increases for the urban households, the IV results is likely capturing the demand response of rural households. Motivated by this reduced from results, we build electricity demand model, estimate the model parameter using method of simulated moment and currently we are in process of confirming the results.