Determinants of Electricity Demand: An Empirical Analysis of Pakistan

Abstract

This study employs a rigorous analytical approach, specifically employing cointegration and vector error correction analysis methodologies, to elucidate the intricate dynamics existing in both the long and short run relationships between electricity demand and its determinants. Through the systematic application of these advanced statistical techniques, our investigation aims to discern and characterize the nuanced interdependencies that govern the fluctuations in electricity demand, providing a comprehensive understanding of the underlying mechanisms at play. The study relies on a comprehensive dataset spanning the years 1970 to 2008, focusing on the context of Pakistan. The application of the Johansen cointegration test reveals compelling evidence that the variables under consideration exhibit a significant degree of integration in the long run. This finding underscores the enduring and interconnected nature of these variables over the specified temporal horizon, contributing valuable insights into the sustained relationships within the studied economic context. The error correction term serves as an indicator of the convergence of variables towards equilibrium. It encapsulates the adjustment mechanism through which deviations from the long-run equilibrium are rectified, emphasizing the dynamic process through which the studied variables align over time.  In the short run, electricity functions as an essential commodity, meeting fundamental needs and playing a pivotal role in sustaining daily activities. Conversely, in the long run, it transforms into a luxury, indicative of an elevated standard of living and an increased capacity for discretionary consumption. This distinction underscores the evolving nature of electricity's role, transitioning from a basic necessity to a symbol of affluence and enhanced lifestyle over an extended temporal horizon. The study draws the conclusion that optimal management of electricity demand necessitates the implementation of effective price and income policies, along with the adoption of group pricing policies and peak-load pricing strategies. These recommendations underscore the importance of a multifaceted approach to address the complexities of electricity demand, emphasizing the need for strategic interventions in pricing structures, income considerations, and targeted policies for managing peak loads.