The dynamics of electricity demand in Pakistan: A panel cointegration analysis

Abstract

This paper examines the dynamics of electricity demand in Pakistan at the aggregate and sectoral levels over the period 1978–2012. Panel cointegration test and Fully Modified Ordinary Least Squares method is employed to determine the long run relationship between electricity consumption, real income, real price of electricity and domestic price of non-energy products. The results reveal that electricity demand is more responsive to changes in income than changes in prices at the aggregate and disaggregate levels. Short run and long run income elasticities are positive and statistically significant, supporting the conservation hypothesis. It appears from the results that long run price elasticities are negative and significant at the aggregate level and for the agriculture, commercial, residential sectors and public utilities. The short run price elasticities are significant but low in magnitude, which implies that changes in electricity price exert minimal effect on the electricity consumption in Pakistan. The domestic price of non-energy products is positive and significant for aggregate sample in the short run, the domestic price of non-energy products exert significant negative (positive) impact on electricity demand in the agriculture (industrial) sectors. The results, thus, provide important information to the agents operating in the electricity market regarding the income and pricing policies and helps in planning the future strategy of electricity demand management.