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Decomposing Electricity Demand Elasticity in Iran: Computable General Equilibrium Approach

Manzoor, Davood and Haqiqi, Iman and Aghababaei, Mohammad (2012): Decomposing Electricity Demand Elasticity in Iran: Computable General Equilibrium Approach. Published in: Biquarterly Journal of Economic Policy , Vol. 4, No. 8 (2012): pp. 91-112.

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Abstract

The purpose of this study is to discuss and show how a general equilibrium analysis can be used to decompose demand elasticity. We apply this framework into the electricity market. To do so, we use a general equilibrium model, assuming Iran as a small and open economy. In this model, we separate the contributions from various mechanisms to the price sensitivity of aggregate electricity demand. The contribution of households and activities demand is separated in the first step and then the contribution of activities are decomposed to three components: substitution effects, scale effects, and re-allocation effects. Our results shows that a 100% increase in electricity price leads to 8.78% decrease in electricity demand, out of which 0.32% is related to households and 8.46% is related to sectors. In activities, substitution effects with 5.9% have a more important role with respect to other effects. Scale effects and re-allocation effects decline the electricity demand by 1.06% and 0.12% respectively. Also "wholesale and retail services" and "metal ores and other minerals" have the highest response to electricity price changes which contribute 2.27% and 1.84% respectively, in total 5.63% substitution effects.

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