Abstract
Vietnam’s electricity consumption has increased more than 20 times over the last 3 decades. As a consequence of the low energy price policy, the demand for electricity in both the residential and industrial sectors has risen at twice the rate of annual economic growth. Thus, there is an urgent need to characterize the properties of this demand and its determinants. This study presents a first household-level estimate of the demand for residential electricity in Vietnam using a 2015 World Bank household registration survey. Estimating a demand function with instrumental variables to address the simultaneity of price and quantity demanded due to an increasing-block-rate pricing policy, we find that the demand for electricity is almost unitarily elastic to average price and even more so to marginal price. Both income and substitution elasticities are low but positive, indicating that electricity is a necessity and that there is limited substitutability between electricity and other sources of energy. This finding implies that pricing instruments could be very effective for demand side management in Vietnam.
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Notes
In a simplified framework of one endogenous variable X and one instrument Z, the limiting distribution of the instrumental variable estimator is:
$$\begin{aligned} {\text {plim}} \hat{\beta }_{IV} = \beta + \frac{{\text {corr}}(Z,u)}{{\text {corr}}(Z,X)}\cdot \frac{\sigma _u}{\sigma _X}. \end{aligned}$$A weak correlation between the endogenous variable and the instrument would result in a large bias, especially in a small sample, even if the exclusion condition is satisfied (Sovey and Green 2011).
According to the Government of Vietnam (2009), a commune must have a population of 4000 or more, with an average population density of 2000 people/km\(^2\) or higher, and the ratio of non-agricultural labor must be at least 65% of the total labor force to obtain type V urban status, which is the lowest classification in the five urban levels. Additionally, there are vague administrative requirements, such as the commune must have an appropriate planning and a clean production slate.
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Acknowledgements
I thank seminar participants at the Fulbright School of Public Policy and Management (FSPPM), the Environment for Development (EfD) Initiative’s annual meeting, the Vietnam Economist Annual Meeting (VEAM), and the Southeast Asia Research Group (SEAREG) meeting for many helpful comments. Particularly, I am indebted to the three anonymous reviewers for invaluable feedbacks on an earlier draft of this paper. All remaining errors are my own.
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Phu, L.V. Electricity price and residential electricity demand in Vietnam. Environ Econ Policy Stud 22, 509–535 (2020). https://doi.org/10.1007/s10018-020-00267-6
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DOI: https://doi.org/10.1007/s10018-020-00267-6