Liquidity Constraints and High Electricity Use

Abstract

It is a well established fact that electricity use increases with income. What is less well known is that - despite the positive correlation between electricity use and income - a significant portion of low-income households consume very large amounts of electricity. In this paper, we make a first step towards better understanding this phenomenon. Specifically, we test the hypothesis that the high electricity use is driven by the fact that low-income households find it difficult to purchase heating oil upfront/in bulk and so use electricity to heat their homes. Using data from the Northern Ireland Continuous Household Survey and the Living Cost and Food Survey, we show that an exogenous increase in income leads to an increase (decrease) in the probability that low-income households use oil (electricity) for heating by approximately 40 (30) percentage points. In addition, we provide evidence which is at odds with a set of alternative explanations for our findings.