Supply and demand of electricity - An estimation of price elasticities for supply and demand in Sweden

Sammanfattning: This thesis estimates yearly price elasticities of electricity from 1996 to 2009 using Two Stage Least Square analysis. A survey of previous research was conducted which finds that there are incentives for producers to regulate production according to price and that consumers are very price insensitive in general. No previous studies were found using Swedish total daily quantities to estimate both the supply and demand elasticities in a Simultaneous Equations Model using instruments for price. Our estimations show positive elasticities for the supply which is in line with profit maximizing behavior of electricity producers. The estimations for the elasticity of demand vary between being positive, negative or not significant. This may implicates that most consumers does not respond to price increases, information that could be useful for market regulating institutions.