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Structural Breaks, Price and Income Elasticity, and Forecast of the Monthly Italian Electricity Demand

Dicembrino, Claudio and Trovato, Giovanni (2013): Structural Breaks, Price and Income Elasticity, and Forecast of the Monthly Italian Electricity Demand.

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Abstract

Insights about electricity demand dynamics is fundamental for investment capacity, optimal energy policies, and a balanced electricity system. This paper presents an empirical analysis of the monthly Italian electricity demand since January 2001 to June 2012. In the first section we conduct the analysis of structural breaks in the electricity demand finding that the series has two structural breaks in August 2002 and August 2004 as market liberalization effects on consumption. In the second part of the paper we estimate demand price elasticities both for residential and industrial sector. As expected from the electricity economics literature concerning elasticities estimates, we find that the long run price and income elasticities are more price elastic than the short run both in industrial and residential consumption. In the third and last section, we compare two different forecasting models: the Hidden Markov Models (HMM) and the Holt Winters (H-W) seasonal smoothing method. Considering the Mean Absolute Percentage Error (MAPE), the HMM approach seems to show a superiority in forecasting the monthly electricity demand compared to the H-W methodology.

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