Electricity tariff reforms and household price elasticity in Azerbaijan: Key policy implications

Azerbaijan's power sector faces structural inefficiencies and limited private investment, remaining financially dependent on public funding for large-scale investments. Therefore, comprehensive reforms are urgently needed. As in various transition economies, a key challenge lies in designing cost-reflective tariff policies that reconcile economic efficiency with social considerations, particularly household affordability. This study evaluated potential electricity tariff reforms to estimate residential price responsiveness by analysing price elasticities using a generalised method of moments (GMM) approach applied to regional panel data for Azerbaijani households. The results showed that residential electricity demand is price inelastic, although substantial regional heterogeneity in price responsiveness was observed. Thus, the study provides two valuable, evidence-based contributions to policymaking. First, it offers region-specific evidence, which is particularly relevant for regional policymaking, as these areas constitute the most socially sensitive segments of transition economies and, therefore, require carefully tailored interventions. Second, in the context of an oil- and gas-based economy, it sheds light on the relationship between electricity prices and gasification rates. Overall, the findings offer policy-relevant insights for designing tariff reforms that improve economic efficiency while preserving social equity.