# **SECTION I: Introduction**

This paper specifies a model of household demand for electricity services and demand in the Indian state of Rajasthan using a combination of survey data, conducted in two districts of Rajasthan, and administrative data, comprising of billing cycle level consumption and charges. This model incorporates customer-level demographic characteristics and weather variables. The model also accounts for the fact that households face increasing block price schedules to recover the parameters of the household’s indirect utility function, which is subsequently used to evaluate the welfare impacts of alternative retail pricing structures.

Our model of the household-level electricity demand embodies the fact that electricity consumption is the result of a household’s demand for hours of service from all electricity-consuming capital goods that it owns. For example, a household does not directly consume electricity, but instead consumes lighting services, which combines electricity use with an electricity-consuming lighting device. The amount of electricity that an hour of lighting service consumption depends on the number of lighting devices a household owns. Combining household-level survey data on electricity appliance holdings and the monthly hours of use of each appliance with the household’s billing cycle electricity consumption and total bill, allows us to recover an estimate of the household’s demand for the following electricity services: (1) lighting, (2) general appliances for domestic end-uses, (3) heating and cooling and (4) business end-uses of electricity.

A two-step estimation procedure is employed that first recovers a household-level “electricity production function” which characterizes the relationship between the household’s billing cycle electricity consumption in kilowatt-hours (kWh) and hours of use of each of four electricity services during that billing cycle. The partial derivative of this “electricity production function” with respect to an electricity service times the marginal price of electricity faced by the household is the effective rupees per hour of use price that the household pays for the last hour consumed of that electricity service. These effective prices and the hours of electricity services consumed along with information on the customer’s monthly electricity bill are used to estimate the household’s billing cycle-level demand for each electricity service. The demand for each electricity service is derived from an underlying model of utility-maximizing behavior subject to a nonlinear budget constraint that arises because the household faces an increasing block price schedule for their electricity consumption. Moreover, there is a nonlinear relationship between a household’s demand for each electricity service and its total electricity consumption for the billing cycle. This structural demand system also offers an estimate of a range of own-price elasticities that can be used to assess the household-level welfare implications of facing different tariff schedules for their monthly electricity consumption.

Our electricity service demand model recovers separate price and income responsiveness for different uses of electricity by the household, as well as cross-price elasticities between the different electricity services. These measures can provide valuable input to the tariff design process. If certain energy services are more inelastically demanded, there are greater opportunities to recover revenues for the distribution utility through price increases to households that consume significant amounts of these services. Alternatively, if certain electricity services are elastically demanded, then providing subsidies to purchase the capital goods necessary to consume these electricity services will increase the willingness to pay of households for electricity. Understanding which of the four energy services has 2