Energy Economics 20 Ž1998.

157]171

Residential energy demand and the interaction of

price and temperature: British experimental evidence
Andrew Henley a,U , John Peirson b
a
Department of Economics, Uni®ersity of Wales Aberystwyth, Penglais, Aberystwyth, Ceredigion,
SY23 3DB, UK
b
Kent Energy Economics Research Group, Department of Economics, Uni®ersity of Kent at
Canterbury, Canterbury, Kent, CT2 7NP, UK

Abstract

The responsiveness of heating energy demand to pricing is shown to be dependent on

temperature and vice versa. This is investigated empirically using residential electricity
demand data obtained under conditions of price variation from a British time-of-use pricing
experiment. Results confirm that consumer responses to higher electricity prices are
conditional on temperature levels, particularly during the daytime and for households with
high overall levels of electricity consumption and previous experience of time-of-use tariffs.
Q 1998 Elsevier Science B.V.

JEL classification: Q41

Keywords: Electricity demand; Time-of-use pricing; Temperature

1. Introduction

Time-of-use ŽTOU. electricity pricing experiments have been widely used, partic-
ularly in North America, to investigate consumer responsiveness to variations in
electricity tariffs with a view to assessing efficiency gains that may be made through
relating prices to the costs of electricity generation Že.g. Aigner and Leamer, 1984;

U
Corresponding author. Tel.: q44 1970 622504; fax: q44 1970 622740; e-mail: arh@aber.ac.uk

0140-9883r98r$19.00 Q 1998 Elsevier Science B.V. All rights reserved

PII S0140-9883Ž97.00025-X
158 A. Henley and J. Peirson r Energy Economics 20 (1998) 157]171

Caves et al., 1984; Kohler and Mitchell, 1984.. Results from these have led to
steadily increasing interest by electricity distribution utility companies in the
adoption of such tariffs on a permanent basis. Recently, interest in TOU pricing
has extended to the UK market for residential electricity, in part resulting from the
increased competition faced by regional electricity distribution companies in the
purchase and supply of residential electricity supplies. Such studies also provide
economists with an almost unique opportunity to examine behaviour by economic
agents under experimental conditions.
The article uses data collected from the Electricity Management Unit Demon-
stration Project ŽEMUDP., only the second British TOU pricing experiment. The
EMUDP was conducted by the Electricity Association of Great Britain and part
funded by the European Union over the period April 1989]March 1990 wsee
Peirson et al. Ž1991. for detailsx. Earlier work by the present authors using the
EMUDP experiment data ŽHenley and Peirson, 1994. investigated electricity
consumption differences between households who volunteered for the experimen-
tal tariffs and a control sample and found significant evidence of electricity
load-shifting by experiment households away from times of the day with a high
price electricity. This was particularly so for households in higher consumption
strata where the income effects of higher tariffs were proportionately larger. This
earlier work did not attempt to estimate directly consumer responsiveness to TOU
price changes and the present article rectifies this.
Residential consumer electricity demand, particularly for space-heating purposes
is likely to vary with weather conditions and in particular temperature. The
combination of consumer preferences for ‘thermal comfort’ and the physics of
space heating suggest that this relationship is unlikely to be a straightforward
linear one, and indeed evidence using the data drawn from the same EMUDP data
source shows this to be the case ŽHenley and Peirson, 1997.. These considerations
suggest that the price elasticity of energy demand is not constant across the
temperature range and the temperature elasticity of energy demand is also not
constant across prices, particularly where the temperature range can be quite large
as in a temperate-maritime climate, such as experienced in the UK. It is therefore
likely that the size of consumer responses to TOU tariffs will be conditional on
outside temperature and electricity prices. This issue is addressed in the present
article and is one that has not been addressed before in the literature on TOU
pricing or energy demand in general.
Using fixed-effects estimation to control for household-specific differences in
consumer demand, we find from the EMUDP data source that the predictions of
the variation in price and temperature elasticities are statistically significant and
vary considerably according to the overall annual electricity consumption of the
household.
The article is composed of four further sections. Sec. 2 discusses the implications
of temperature-price interaction for the modelling of TOU electricity pricing data.
Sec. 3 provides background information on the EMUDP data source and the
nature of the experimental tariff used to generate TOU data. Sec. 4 provides a
specific discussion of the empirical modelling of data from the EMUDP and
 A. Henley and J. Peirson r Energy Economics 20 (1998) 157]171 159

discusses some problems which arise. Sec. 5 presents and discusses econometric
results which examine the importance of price]temperature interaction effects.
Finally in Sec. 6, various conclusions are given.

2. Modelling TOU pricing demand data

The most common approach in the literature to modelling time-of-use electricity

demand behaviour is through a two stage model. The consumer initially allocates a
share of his or her total budget to electricity consumption and in the second stage
allocates the electricity budget to different time periods of the day in the light of
the TOU tariff. The majority of studies assume that consumers possess a utility
function which is separable between electricity and other goods Žsee for example
the various studies in the 1984 Journal of Econometrics.. While the assumption of
homotheticity which is entailed here can be questioned on grounds of realism wand
has been rejected in empirical tests, see Hausman and Trimble Ž1984.; Caves et al.
Ž1987.x, the advantage of such an approach is that it yields tractable model
specifications. More complex model structures, in which electricity expenditure in
each time period is determined according to a separate utility function have been
proposed Že.g. Kohler and Mitchell, 1984. but yield highly complex empirical
specifications which present problems in estimation.
Any modelling of the effects of time-of-use pricing on household electricity
demand must control for the effects of temperature and that these effects should
be explicitly specified. Typically studies control for temperature variation either by
including it as an additional explanatory variable or by some pre-estimation
temperature normalisation procedure wsee the review by Peirson et al. Ž1991.x.
Misspecification may occur if own- and cross-price Žwith the price of electricity in
other time periods. elasticities of demand vary with temperature and temperature
elasticities vary with price. An appropriate demand specification must therefore
model price and temperature interactively wsee Henley and Peirson Ž1996. for a
theoretical development of this pointx. This can be easily achieved through use of
the trans-log specification with the inclusion of an interaction term in price and
temperature Žln p.ln u ., or through the equivalent generalised Leontief specifica-
tion. Given the discussion above concerning the difficulties of model specification
and estimation if electricity and other consumption are assumed non-separable, we
assume separability. For simplicity, we will at present only consider own price and
temperature as explanatory variables. The trans-log specification of demand for
household i in time period j, Q i j and the elasticities m p i j and mu i j are:
2
ln Q i j s a j q b j ln u i j q g j ln pi j q 0.5 r j Ž ln u i j .
2
q 0.5p j Ž ln pi j . q t j ln u i j ln pi j q e i j
m p i j s g j q p j ln pi j q t j ln u i j
mu i j s b j q r j ln u i j q t j ln pi j Ž1.
160 A. Henley and J. Peirson r Energy Economics 20 (1998) 157]171

where a , b , g , r , p and t are parameters and e i j is a normally distributed

white-noise error term.
It might also be expected that the levels of the price of energy at other times of
the day affects the elasticities considered here. If the cross prices are low and the
temperature falls it may be possible to substitute consumption to other periods.
This suggests that the temperature elasticity is higher when cross prices are low.
The discussion above suggests that a trans-log specification is most appropriate for
modelling TOU electricity demand where significant variation in outside tempera-
ture is present. The specification given in Eq. Ž1. allows for a quadratic effect in
temperature as well as prices. Previous work by the present authors ŽHenley and
Peirson, 1997. has suggested, using the data from the same source, that a paramet-
ric polynominal specification of the relationship between electricity demand and
temperature may lead to significant biases, particularly at extreme temperatures,
and that a non-parametric or semi-parametric specification may be more appropri-
ate. A simple semi-parametric adaption to the specification in Eq. Ž1. is discussed
in Sec. 5.

3. Overview of the EMUDP experiment

The EMUDP pricing experiment was conducted during the period between April
1989 and March 1990 across a stratified random sample design of 150 households
drawn voluntarily from five regional electricity distribution companies across
England and Wales. The sample is divided into two ex ante equally sized groups,
which were assigned to one of two experimental tariffs 1. Prior to the experiment
Žand during it in the case of the control group., households were supplied on either
a fixed tariff ŽStandard tariff. or on a 7-h nighttime off-peak price marketed in
conjunction with electricity storage heating ŽEconomy 7.. The sample design
provided for households to be selected randomly from each of three consumption
strata for those from the Standard tariff base Ž1000]3500 kWhryear, 3501]7000
kWhryear and ) 7000 kWhryear. and from two consumption strata for those
from the Economy 7 base Ž1000]10 500 kWh and ) 10 500 kWh.. Data was
obtained to provide sufficient information for present purposes across the year of
the experiment on 126 households.
Both of the experimental tariffs allows consumers to use cheap nighttime
electricity Žsomething that those from the Economy 7 base would have already had
experience of. and cheap electricity in the late evening and at weekends. On the
other hand, weekday consumption between 07.30 h and 20.00 h was made more
expensive by the tariff, and for one of the tariffs ŽOption ‘A’. a sizable ‘spike’ in the
electricity price was introduced in the early evening during the winter months.
Option ‘B’ did not incorporate an early evening ‘spike’ and exhibited rather less

1
The question of sample self-selection is important, as all households were volunteers wsee Aigner and
Ghali Ž1989.x. However, given the absence of data from any mandatorily chosen British households, we
are unable to assess the extent of any bias.
 A. Henley and J. Peirson r Energy Economics 20 (1998) 157]171 161

Table 1
Illustrative tariff structures for London Electricity ŽpencerkWh.

Prior to experiment Experimental tariff

Standard Economy 7 March] November and December]
households households October February January

Option A
Weekdays 6.16
00.30]07.30 h 2.22 2.22 2.22 2.22
07.30]16.00 h 6.49 5.24 7.56 9.71
16.00]19.00 h 6.49 5.24 19.10 40.71
19.00]20.00 h 6.49 5.24 7.56 9.71
20.00]00.30 h 6.49 5.24 3.71 3.71
Weekends 6.16
00.30]07.30 h 2.22 2.22 2.22 2.22
07.30]00.30 h 6.49 3.71 3.71 3.71

Option B March] November]

October February
Weekdays 6.16
00.30]07.30 h 2.22 2.22 2.22
07.30]16.00 h 6.49 4.33 15.80
16.00]19.00 h 6.49 4.33 15.80
19.00]20.00 h 6.49 4.33 15.80
20.00]00.30 h 6.49 4.33 4.33
Weekends 6.16
00.30]07.30 h 2.22 2.22 2.22
07.30]00.30 h 6.49 4.33 4.33

Source: Electricity Association Services.

seasonal variation than Option ‘A’. The underlying philosophy of the experiment
was to see if time-of-use pricing could induce load-shifting by residential con-
sumers away from the early evening period when marginal generation of electricity
is most costly. There was some variation in the prices faced by households across
the five participating companies Žreflecting variations in the prices normally
changed to residential customers., but the basic structure and particularly the time
structure remained the same. The practical need to relate experimental prices to
generating load does introduce a conflict with the ideals of the present economet-
ric investigation, since prices tend to be Žnegatively. collinear with temperature.
Table 1 provides details of the two experimental tariffs and the normal standard
and Economy 7 prices for London Electricity for illustrative purposes.
The time structure of Tariff Option ‘A’ divides the weekday Žat least in
December and January. into five periods. Household consumption was recorded
for half-hourly intervals throughout the whole year and we aggregate these raw
data to provide consumption during each of the five periods of the day, for each
162 A. Henley and J. Peirson r Energy Economics 20 (1998) 157]171

household for each day of the year of the experiment duration 2 . The range of
variation in the prices within the tariff is very large. In winter, the early evening
price ‘spike’ faced by households was over 18 times more expensive than the
cheapest nighttime electricity and over six-and-a-half times more expensive than
the standard price of electricity to which they had previously been used. Henley
and Peirson Ž1994. investigated mean demand comparisons for these five time-peri-
ods for weekdays in the 2 months of December and January between the Tariff
Option ‘A’ group and the control sample. Henley and Peirson Ž1994. report results
to show that households on the experimental tariff responded by shifting electricity
consumption from the expensive early evening and daytime periods into the night.
One of the main conclusions from this earlier work was that the size of the effects
of time-of-use pricing will vary across consumption strata and that full-scale
econometric models of electricity demand which impose homogeneity across strata
may result in loss of important information.
The structure of tariff option ‘B’ is rather simpler } it avoids the late afternoon
‘spike’ and does not have the same degree of variation across the months during
the winter period. Nevertheless, for consumers who were formerly on the single
price standard tariff it still introduces considerable time-of-day price variation. The
most expensive winter weekday price is over seven times more expensive than
cheap nighttime electricity.

4. Empirical approach

Direct estimation of price elasticities from TOU experiment data presents a

number of problems. Firstly, it is important to control for other influences on
electricity demand, including other climatic effects and household-specific influ-
ences on electricity consumption, such as durable ownership and income. Secondly,
in most TOU experiments the experiment designers face a trade-off between
establishing experimental tariffs that will yield information of commercial useful-
ness about the efficacy of linking tariffs to marginal generation costs and the use of
tariff variability to yield price effects that can be estimated ŽHirschberg, 1989.. One
consequence of this problem is that actual TOU tariffs often incorporate early
evening peak-load pricing offset by cheaper Žthan pre-experiment. nighttime elec-
tricity. The early evening peak in the tariff reflects the use of peak-load pricing in
the supply of electricity to distribution companies by generating companies. This
means that tariff structures are highly linearly dependent, with prices at particular
times of the day highly correlated Žeither positively or negatively. with prices at
other times of the day across the available sample. A third problem concerns the

2
Random demand-recorder failure meant that an incomplete run of data was collected. In a small
number of cases recorder failure was extensive during the winter months when price variability under
the tariffs was greatest and these households have been omitted from the data sample used for
secondary analysis.
 A. Henley and J. Peirson r Energy Economics 20 (1998) 157]171 163

importance of strata effects. Specifically, consumer response to the TOU tariff may
be dependent on the consumer’s overall level of electricity consumption.
On the first issue of controlling for other influences on electricity demand, we
adopt a fixed-effects estimation approach which allows us to control for time-in-
variant household specific influences. This requires us to assume that household
ownership of domestic appliances remains unchanged over the year of the experi-
ment. Households participating in the experiment were questioned about durable
ownership on recruitment and were questioned about additional purchases towards
the end of the experiment. Reported levels of new durable purchase were very low.
We also assume that variations across households in income levels are captured by
the fixed effects. We do not have information on changes in income levels during
the year of the experiment and must assume that these remained unchanged, or
that any changes did not significantly affect the pattern of electricity consumption.
Other influences on electricity demand are clearly not time-invariant. The most
important of these is weather.
An extensive literature exists on the relationship between weather and electricity
demand, since this relationship has a direct impact on load forecasting techniques
Žsee Engle et al., 1986; Peirson and Henley, 1994.. Henley and Peirson Ž1997.
employ the EMU experiment data to investigate the relationship between outside
temperature and residential demand, using both parametric and non-parametric
techniques, and find evidence of considerable non-linearities. Furthermore, we
show that a parametric polynomial specification of temperature effects may lead to
serious bias in the estimated effect of temperature on demand at temperatures
away from the sample mean. This conclusion contrasts with the earlier discussion
in which the demand-temperature interaction is linear ŽEquation 11.. A non-para-
metric approach is computationally infeasible for present purposes but the results
of this earlier article suggest that the non-linear relationship may be adequately
represented by a three-segment piecewise linear spline function, with breaks at 50
and 688F for both the simple temperature variable and the interaction with price
variables 3. Additional climatic effects, particularly on demand for illumination
purposes, are captured through the use of hours of morning ŽMDARK. and
evening darkness ŽEDARK. variables. Finally a weekend dummy variable and
dummy variables for public holidays are included.
On the second issue of the nature of the experimental tariff, the EMU tariffs do
present some problems of singularity. Firstly, as can be seen from Table 1, the
nighttime price Ž00.30]07.30 h. is time invariant and the late evening price
Ž20.00]00.30 h. is time invariant in option B. This means that we cannot directly
estimate any own- or cross-price responsiveness for the nighttime price. In initial
work, we found it very difficult to separately estimate terms for the late evening
price. Secondly the two periods 07.30]16.00 h and 19.00]20.00 h always attract the
same price. This means that we are unable to estimate separate price responsive-
ness for bringing forward and postponing electricity consumption from the expen-

3
Temperature is measured in 8F to allow the use of the log transformation.
164 A. Henley and J. Peirson r Energy Economics 20 (1998) 157]171

sive 16.00]19.00 h period. We therefore amalgamate demand for these two

time-periods together 4 . In effect, we can use only two price variables, the price of
electricity faced by households during the daytime and for the 1 h in the mid-even-
ing and the price of electricity faced by households during the Žexpensive. early
evening period. This means that we must exercise some caution in interpreting any
estimated elasticities as being clearly identified own- or cross-price elasticities,
particularly for the late-evening and nighttime periods.
The third issue that price responses may be dependent on overall consumption
has already been discussed in Sec. 4. The implication for the modelling of demand
is that a full specification may require price and temperature effects to vary
according to consumption strata. Given the stratified nature of the EMUDP
sample design, it would seem most sensible to allow for separate effects for each of
the five strata. However, a full trans-log specification of this form will contain a
large number of parameters and may be prone to considerable problems of
multicollinearity.
Furthermore, it ought to be pointed out that we adopt a single equation
estimation method for present purposes. A multiple equation generalised least
squares procedure, in which a different equation is simultaneously estimated for
each TOU period, would be computationally very complex with such a large panel
of data. Furthermore, the use of fixed-effects estimation, combined with adequate,
extensive parameterisation of temperature and price effects ought to considerably
reduce any remaining cross-equation residual covariance and mean that any
improvements in estimation efficiency will be marginal.

5. Trans-log demand function results

Table 2 reports trans-log demand function results for the four periods of the day
where the weekday price is different including only temperature and own-price
terms. Since the prices in the nighttime period Žcolumn 1. and the late-evening
period Žcolumn 4. are invariant across the year for a given household 5 then no
price terms are included. The demand data was found to be autoregressive, with
significant correlation with the previous days’ consumption and the consumption of
the same day in the previous week. Each equation therefore includes 1st and 7th
order lagged dependent variables.6 In addition to price, temperature and illumina-

4
A further justification for this is the short length of the 19.00]20.00 h period. Total consumption is
likely to be small and potentially subject to relatively large random influences.
5
There is some variation in price across Regional Electricity companies, but this would be captured
through the household fixed-effect.
6
It is well known that the inclusion of lagged dependent variables can render fixed-effects estimation
inconsistent Žsee Hsaio, 1986.. The extent of the bias is of the order of y Ž1 q g .rT where g is the
sum of the coefficients on the lagged dependent variable and T is the number of time-series
observations. However, in the present case, with a very large T, this bias turns out to be very small
Žtypically of the order of less than 0.5%.. Thus, the results reported do not instrument the lagged
dependent variable.
 A. Henley and J. Peirson r Energy Economics 20 (1998) 157]171 165

tion variables, each estimation also included weekend and bank-holiday dummy
variables Žcoefficients not reported.. Illumination effects appear to be stronger in
the evening and particularly in winter when darkness affects the late afternoon. An
extra hour of darkness increases electricity demand by up to 15%. The table also
reports F-tests for the joint significance of the household fixed effects, the
temperature, price and temperature-price interaction terms. In all four time-peri-
ods, the fixed-effects and temperature terms are highly jointly significant. The
temperature spline coefficients show the same non-linear relationship between
demand and temperature as in Henley and Peirson Ž1997. } namely that demand
falls more sharply once temperature has risen above 508F Ž108C., but that the
relationship flattens, or even starts to rise again, above 688F Ž208C..
Despite evidence of significant temperature effects, it is only in column 2, for the
period covered by the main daytime TOU price that any own-price terms are
statistically significant and only when interacted with temperature. The positive
coefficient on the interaction term between price and the temperature spline
segment above 508F suggests that the price elasticity of demand becomes less
negative Žor more positive. at higher temperatures.
The results presented in Table 2 are clearly unsatisfactory in that they fail to
control for movements in the price of electricity at other times of the day. Thus,
whilst the price of nighttime electricity remained unchanged throughout the
duration of the experiment, the relative attractiveness of nighttime consumption
may have changed as other period prices changed. Table 3 includes cross-price
terms. P 2 denotes the price during the daytime period Žmodelled as column 2 in
Tables 2 and 3. and P3 denotes the price during the 16.00]19.00 h period
Žmodelled as column 3. 7. In columns 1 and 4, both sets of price terms are
cross-prices. Generally, the price and price]temperature interaction terms are only
significant in column 2 and this is confirmed by the reported F-tests of joint
significance. There is little statistically significant evidence that the TOU tariff had
much impact in the evening and at nighttime. The high early evening price
Ž16.00]19.00 h. appears to have affected households by inducing reduced daytime
demand.
Given the complex nature of the trans-log specification, the impact of price and
temperature changes is best illustrated through the calculation of elasticities at
various prices and temperatures. Table 4 reports elasticities calculated from
column 2 of Table 3. The table reports own-price, cross-price and temperature
elasticities at prices equivalent to summer and winter levels in London for Tariff A
at a mid-range temperature of 508Fr108C. The elasticities are generally small in
magnitude and sensibly signed Ži.e. negative for own price and positive for cross
price.. Fig. 1 illustrates this further by graphing the own- and cross-price elasticities
at the higher prices over the observed range of noon temperatures in 1989]1990
Žfrom just below freezing to approx. 858Fr298C.. The figure shows that the
own-price elasticity is negative between 398F and 648F. The cross-price elasticity is

7
The terms in log P3.log u68 are omitted to avoid multicollinearity.
166 A. Henley and J. Peirson r Energy Economics 20 (1998) 157]171

Table 2
Fixed-effects estimates of demand with temperature and own-price effects

Ž1. Ž2. Ž3. Ž4.

00.30]07.30 h 07.30]16.00 h 16.00]19.00 h 20.00]00.30 h
q19.00]20.00 h
log Qty 1 0.587 0.368 0.413 0.425
Ž0.004.U Ž0.004.U Ž0.004.U Ž0.004.U
log Qty 7 0.253 0.189 0.239 0.154
Ž0.004.U Ž0.005.U Ž0.004.U Ž0.004.U
log u y0.067 y0.164 y0.110 y0.146
Ž0.036.UU Ž0.175. Ž0.104. Ž0.038.U
log u50t y0.143 y0.987 y0.459 y0.254
Ž0.054.U Ž0.358.U Ž0.218.U Ž0.057.U
log u68t 0.389 1.473 0.892 0.522
Ž0.083.U Ž0.839.UU Ž0.744. Ž0.088.U
log Pt 0.181 y0.217
Ž0.447. Ž0.169.
0.5wlog Pt x2 y0.128 0.021
Ž0.122. Ž0.018.
wlog P.log u xt 0.005 0.035
Ž0.099. Ž0.041.
wlog P.log u50 xt 0.558 0.027
Ž0.222.U Ž0.122.
wlog P log u68 xt y0.832 y0.316
Ž0.553. Ž0.487.
MDARKt 0.019 0.020
Ž0.003.U Ž0.015.
EDARKt 0.149 0.075 0.068
Ž0.007.U Ž0.004.U Ž0.006.U
R2 0.864 0.580 0.656 0.603
Fixed effects
F125, nTyk 11.8U 30.2U 22.1U 29.5U
Temperature terms
F3, nTyk 27.8U 11.4U 6.0U 114.3U
Price terms
F2, nTyk 0.57 1.13
Interaction terms
F3, nTyk 5.2U 0.59
n s 126
nT s 40 713

Notes: all regressions include weekend and bank-holiday dummy variables.

U
Significance at 5%.
UU
Significance at 10%.

positive within almost the same temperature range. The variation in the own- and
cross-price elasticities with temperature are large and statistically significant. The
relationship between price elasticities and temperature varies across the tempera-
ture range, as predicted in Sec. 2. Over most of the temperature range at which the
chosen own and cross prices operate, the elasticities have the expected signs.
 A. Henley and J. Peirson r Energy Economics 20 (1998) 157]171 167

Table 3
Fixed effects estimates of demand with temperature, own and cross price effects

Ž1. Ž2. Ž3. Ž4.

00.30]07.30 h 07.30]16.00 h 16.00]19.00 h 20.00]00.30 h
q19.00]20.00 h
log Qty 1 0.587 0.367 0.413 0.424
Ž0.004.U Ž0.005.U Ž0.004.U Ž0.004.U
log Qty 7 0.253 0.189 0.239 0.153
Ž0.004.U Ž0.005.U Ž0.004.U Ž0.004.U
log u 0.229 0.644 0.103 y0.049
Ž0.401. Ž0.435. Ž0.476. Ž0.423.
log u50t y0.222 y2.148 y1.065 y0.679
Ž0.575. Ž0.621.U Ž0.676. Ž0.608.
log u68t 0.590 2.111 1.275 0.140
Ž0.854. Ž0.922.UU Ž1.010. Ž0.898.
log P 2t 1.409 4.117 0.058 0.152
Ž1.783. Ž1.936.U Ž2.116. Ž1.883.
0.5wlog P 2t x2 0.164 y0.237 0.353 0.217
Ž0.136. Ž0.148.UU Ž0.163.U Ž0.143.
wlog P 2.log u xt y0.462 y0.978 y0.227 y0.159
Ž0.447. Ž0.485.U Ž0.529. Ž0.472.
wlog P 2.log u50 xt 0.189 2.010 0.588 0.421
Ž0.625. Ž0.676.U Ž0.734. Ž0.659.
wlog P 2 log u68 xt y0.147 y1.273 y0.575 0.205
Ž0.567. Ž0.613.U Ž0.670. Ž0.597.
log P3t y0.630 y1.520 y0.296 y0.309
Ž0.656. Ž0.715.U Ž0.777. Ž0.694.
0.5wlog P3t x2 y0.051 0.027 y0.038 y0.003
Ž0.024.U Ž0.030. Ž0.028. Ž0.025.
wlog P3.log u xt 0.202 0.382 0.108 0.090
Ž0.166. Ž0.180.U Ž0.196. Ž0.175.
wlog P3.log u50 xt y0.061 y0.604 y0.142 y0.105
Ž0.266. Ž0.288. Ž0.312. Ž0.280.
MDARKt 0.020 0.006
Ž0.003.U Ž0.018.
EDARKt 0.151 0.073 0.066
Ž0.007.U Ž0.004.U Ž0.006.U
R2 0.864 0.580 0.656 0.603
Fixed effects
F125, nTyk 11.8U 30.2U 22.1U 29.6U
Temperature terms
F3, nTyk 0.58 8.9U 3.21U 4.64U
P 2 price terms
F2, nTyk 1.48 2.74UU 2.66 1.32
P 2 interaction terms
F3, nTyk 1.25 3.37U 0.33 0.65
P3 price terms
F2, nTyk 3.86U 2.28UU 1.27 0.14
P3 interaction terms
F2, nTyk 1.31 2.53UU 0.15 0.13
n s 126
nT s 40 713

Notes: all regressions include weekend and bank-holiday dummy variables.

U
Significant at 5%.
UU
Significant at 10%.
168 A. Henley and J. Peirson r Energy Economics 20 (1998) 157]171

Table 4
Calculated price and temperature elasticities for daytime demand

Elasticity of demand At 508F

with respect to:
Own-price elasticity
P 2 s 5.24 prkWH y0.102
Own-price elasticity
P 2 s 9.71 prkWH y0.249
Cross-price elasticity
P3 s 5.24 prkWH 0.019
Cross-price elasticity
P3 s 40.71 prkWH 0.074
Temperature elasticity
P 2 s P3 s 5.24 prkWH y0.343
Temperature elasticity
P 2 s 9.71 prkWH,
P3 s 40.71 prkWH y0.163

Calculated from results reported in Table 3, column 2.

Outside of this range, the elasticities are small but have unexpected signs. As there
are very few observations in the data for the chosen own and cross prices and
temperatures outside the 39]648F range, the implausible signs are not a cause for
concern. It should be emphasised that the specification of the interaction terms are
only approximations and cannot be expected to predict behaviour outside the
observed sample.
The temperature elasticities reported in Table 4 are both of the expected
negative sign and suggest that electricity demand is fairly inelastic with respect to
temperature. Given that the price]temperature interaction terms are jointly statis-
tically significant and generally individually significant we can conclude that
differences in the elasticities over the temperature range are of statistical impor-
tance. Fig. 2 provides a surface plot of the temperature elasticity over the range of
variation of the two prices. The elasticity becomes more negative as P3 rises and
P 2 falls. The elasticity rises above zero when P 2 is high and P3 is low, a price
combination that is not observed in the data.

6. Conclusions

Time-of-use electricity pricing studies offer economists a rare opportunity to

examine experimentally generated data. However, it is well known from the North
American studies that conclusions drawn from such experiments can be imprecise
and contradictory. In part this is due to problems inherent in the conflict between
the commercial usefulness and the econometric attractiveness of TOU tariff
design. It may also be due to problems of model specification. It has been
frequently pointed out that many TOU experiments have been poorly designed
 A. Henley and J. Peirson r Energy Economics 20 (1998) 157]171 169

Fig. 1. Daytime price elasticities.

Žsee Aigner, 1979; Manning et al., 1979; Aigner and Leamer, 1984; Caves et al.,
1984; Hirschberg, 1989..
The present article has shown that there are good reasons for thinking that price
effects on electricity demand are conditional on temperature and vice versa.
Traditional investigations which ignore these interactions are likely to generate
misleading conclusions particularly away from mean temperatures and prices. This
is likely to lead to false conclusions about the efficacy of use TOU pricing to
induce time-shifting away from periods of peak load Žfor example, early evening in
winter.. The significance of these interactions may explain some of the variation in
the estimated results of previous TOU experiments. The estimated interaction
effects are both statistically significant and quantitatively important.
Evidence from data used in the present article suggests that households mainly
respond to TOU tariffs by adjusting daytime consumption. Opportunities for
shifting consumption into the nighttime seem not to be taken wbut this may be due
to the short-term nature of the experiment under investigation } households
facing a permanent TOU tariff may be more likely to invest in equipment to allow
easier load shifting Žsee Hausman and Trimble, 1984.x.
170 A. Henley and J. Peirson r Energy Economics 20 (1998) 157]171

Fig. 2. Demand elasticity wrt temperature between 50 and 688F.

The article also shows that the effects of TOU tariffs may be dependent on the
household’s overall level of consumption. For households who use moderate
amounts of electricity for general uses other than heating, the opportunities for
load shifting may be severely limited. For example refrigeration and lighting load
cannot be time shifted and load for cooking purposes may be only shifted to a
small extent. It is therefore not surprising that significant TOU tariff effects tend
not to be found. On the other hand, households who use electricity for space
heating purposes would in the British context have become used to load-shifting
into the nighttime since electric storage heating and a permanent cheap nighttime
tariff are marketed together. However, for these households TOU effects may be
temperature dependent } at very cold temperatures the desire for thermal
comfort may outweigh the negative effect of high daytime TOU prices.

Acknowledgements

The data used in this article were kindly provided by Electricity Association
Services Ltd. and were collected as part of the Electricity Management Unit
Demonstration Project, part-funded by the European Union over the period April
1989 to March 1990. The responsibility for the results presented and for the
opinions expressed in the article rests solely with the authors.
 A. Henley and J. Peirson r Energy Economics 20 (1998) 157]171 171

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