Permanent VS Transitory Shocks to Electricity Consumption: Panel Evidence from 19 African Countries

Abstract

ABSTRACT: Considering Africa's increasing electricity demands and the pivotal role of electricity in socio-economic development, this study addresses a research gap in understanding the stochastic properties of per capita electricity consumption in African contexts. Through examining the integration properties of per capita electricity consumption across 19 African countries, the research determines whether 'shocks' yield transitory or permanent effects, aiding policy formulation and future demand forecasting. Annual electric power consumption data (1971 – 2014) (kWh per capita) from the WDI across 19 African countries are used. Our methodology starts with formally testing for cross-sectional dependence (CSD) using various tests to avoid potential size distortions. Subsequently, we employ the novel panel stationarity test of Nazlioglu and Karul (2017), a Fourier KPSS panel stationarity test. The robustness of the analysis is enriched by incorporating the Hadri and Kurozumi (2011) panel stationarity test and Nazlioglu et al. (2021) new panel stationary tests. The CSD test results reveal mutual dependency in electricity consumption among the sampled African countries, underscoring the need for a panel testing methodology that accommodates CSD. The results of the panel stationarity tests that allow CSD and structural breaks—specifically, the Nazlioglu and Karul (2017) test, which models structural breaks as a gradual process—reject the null hypothesis of trend stationarity for both single frequencies, i.e., k =1, and 2. Similarly, all new, complementary panel stationarity tests from Nazlioglu et al. (2021) reject the null hypothesis of stationarity for both frequencies. Collectively, the outcomes from various panel stationarity tests present strong evidence of nonstationary per capita electricity consumption within the sampled African countries. Additionally, the Nazlioglu and Karul panel stationarity test enables an analysis of the individual Fourier KPSS test for cross-sectional units in the panel. Of the 19 countries, only Togo does not reject the null hypothesis of stationarity for both frequencies. These individual country results align with the panel outcomes, providing compelling evidence for the nonstationarity of the per capita electricity consumption series across the investigated African nations. Accordingly, shocks to electricity consumption will have permanent effects, indicating that per capita electricity consumption will not return to its pre-shock equilibrium path. In this case, demand or consumption stabilizing policies will have long-run effects.