Investigating the effects of renewable energy utilization towards the economic growth of Sri Lanka: A structural equation modelling approach

Abstract

With the rapid depletion of natural resources and increased environmental pollution, nations across the world are in a desperate need of achieving the common goal of sustainable development. Combustion of fossil fuels along with other human activities over the past few decades have resulted in increased greenhouse gas emissions leading to the climate change and the multi-scale pollution of land, air and water that the world is experiencing today. Hence, the focus has now been shifted towards the sustainable and renewable energy sources while prompting a circular economy. Being one of the island nations of South Asia, Sri Lanka has also aligned the country's economic strategies with the global trends and aims to be a 100% sustainable energy dependent nation by 2050. Consequently, there has been a gradual rise in the renewable energy establishments in the country over the past two decades. This study aims to analyze the influence of these establishments on the economic growth of the country, using a structural equation modelling approach. A conceptual model was formulated to represent the relationships between the renewable energy consumption and the key economic indicators, and also a path analysis was carried out to explore the relationships among the variables. The fit of the conceptual model to the secondary data collected related to the economic and energy indicators was established using a number of statistical fit indices such as the Chi-square, absolute fit indices and the root mean square error of approximation. The results indicate that there is no significant direct effect of the renewable energy consumption on the GDP of Sri Lanka yet, but there is an indirect positive effect through capital formation and also an indirect negative effect through trade balance. Hence, it is clear that renewable energy establishments have to be promoted through incentives/policies that lead to capital accumulation via increased renewable energy consumption. Moreover, the analysis and the findings presented in this study can be related and are applicable to many of the emerging economies across the globe. • This paper analyses the effect of renewable energy usage on economic growth. • This discusses the renewable energy profile of Sri Lanka. • SEM approach identifies links among renewable energy usage and economic growth. • Analysis and findings of this paper are related to emerging economies. • This discusses the renewable energy potential of Sri Lanka.