Electricity price and residential electricity demand in Vietnam

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.