Determinants of Electricity Demand: An Empirical Analysis of Pakistan

Abstract

This study applies cointegration and vector error correction analysis to examine the long- and short-run relationships between electricity demand and its determinants in Pakistan from 1970 to 2008. The Johansen cointegration test confirms a significant long-run integration among variables, highlighting their enduring interconnections over time. The error correction term indicates the adjustment mechanism that restores equilibrium after deviations, reflecting the dynamic nature of electricity demand. In the short run, electricity remains a necessity, meeting essential daily needs. However, in the long run, it evolves into a luxury, symbolizing a higher standard of living and discretionary consumption. This transition underscores the shifting role of electricity from a fundamental requirement to an indicator of affluence over time. Effective management of electricity demand requires strategic policy interventions. The study emphasizes the need for price and income policies, along with targeted pricing mechanisms such as group pricing and peak-load pricing. These approaches can optimize electricity consumption while maintaining economic stability. Policymakers should focus on structuring electricity tariffs to reflect demand variations, ensuring affordability for lower-income groups while promoting efficiency. Additionally, demand-side management strategies should be implemented to address consumption patterns and mitigate excessive electricity use. Understanding the intricate relationship between electricity demand and economic factors can guide sustainable energy policies. Future research should explore additional determinants, including technological advancements, urbanization, and industrial expansion, to develop comprehensive strategies for managing electricity demand effectively in Pakistan’s evolving economic landscape.