Analyzing the elasticity and subsidy to reform the residential electricity tariffs in China

The rapid and massive process of urbanization in China has made the energy consumption of the residential sector an important motivator in national energy consumption. As the most important part of household energy consumption, electricity and its demand-side management play fundamental roles when exploring the methods of energy reform in China. Based on the framework of household production theory, this paper estimates the elasticities of Chinese residential electricity from 2006 to 2016 by using the data of 286 cities, and the first difference generalized method of moment estimator is employed. The results show that the demand for residential electricity is inelastic to price and is mainly affected by total expenditure, price of appliance and temperature. We also find that factors impacting electricity consumption vary among regions, and the demand is elastic to price change with the samples of the lowest domestic product. With the elasticity we estimated, a Ramsey tariff is calculated and compared with the current tariff, and the subsidy for residential electricity consumption is also analyzed. Based on the results, we propose to raise the price appropriately, and suggest the implementation of diversified pricing schemes according to regional characteristics to control the consumption by realizing the price mechanism, and to promote energy-saving and emission reduction in the residential sector.