THE RELATIONSHIP BETWEEN ELECTRICITY CONSUMPTION AND ECONOMIC GROWTH IN NIGERIA

ABSTRACT

This study empirically examined the relationship between energy consumption and economic growth in Nigeria. Time series data was generated covering the period 1970 through 2009. The study used electricity consumption and real gross domestic product to test for this relationship. By applying unit roots, the co-integration techniques, and static regression analysis, the results derived infer that there exists a positive relationship between current period electricity consumption and economic growth and so, the null hypothesis predicted is not supported by this study. The implication of the study is that increased electricity consumption is a strong determinant of economic growth having an implicit effect in lagged periods and both an implicit and explicit effect on the present period in Nigeria. Thus, it is pertinent that this sector should be given more relevance by fully implementing the process of electricity liberalization and privatization, exploiting the opportunities laden in the sector to increase economic growth. It further recommends that emphasis on non-market policies like public enlightenment, enforcing energy efficiency standards will encourage electricity conservation and efficiency especially in the residential sector which is the largest consumer of electricity in Nigeria. Lastly, providing steady electricity supply is paramount for the country’s drive towards industrialization.

TABLE OF CONTENTS

                                                                                                                   Page

Title page                                                                                                    i

Certification                                                                                                         ii

Dedication                                                                                                  iii

Acknowledgements                                                                                     iv      

Table of Contents                                                                                                 v

List of Tables/ figures                                                                                 viii

Abstract                                                                                                      ix

CHAPTER ONE- INTRODUCTION

1.1            Background to the Study                                                                            1

1.2            Statement of the Problem                                                                           3

1.3            Objectives of the Study                                                                     4

1.4            Research Questions                                                                           4

1.5            Hypothesis for the Study                                                                           4

1.6            Significance of the Study                                                                            5

1.7            Brief Methodology                                                                                     6

1.8            Plan of the Study                                                                              6

CHAPTER TWO- LITERATURE REVIEW

2.1     Introduction                                                                                     7

2.2     Empirical review                                                                              7

2.3     The Electricity Power Sector of Nigeria                                           10

2.4     Electricity Consumption in Nigeria                                                  15

CHAPTER THREE- THEORETICAL FRAME WORK AND METHODOLOGY

3.1     Introduction                                                                                      21

3.2     Theoretical Framework                                                                     21     

3.3     Methodology                                                                                    23

3.4     Sources of Data                                                                               23

3.5     Re- statement of Hypothesis                                                            24

3.6     Specification of Model                                                                     25

3.7     Estimation Technique                                                                      25     

3.8     Statistical Test                                                                                 29

CHAPTER FOUR- EMPIRICAL RESULT AND DISCUSSION

4.1     Introduction                                                                                     32

4.2     Descriptive Statistics                                                                       32

4.3     Unit Root Test                                                                                 36

4.4     Co integration Test                                                                          37

4.5     Long run Static Regression Analysis                                                38

4.6     R- Square and Adjusted R- Square                                                  39

4.7     Model Goodness of Fit                                                                     39

4.8     Correction Model                                                                              40

4.9     Discussion of Findings                                                                      42

CHAPTER FIVE- SUMMARY, RECOMMENDATIONS AND CONCLUSION

SUGGESTION FOR FURTHER STUDY

 5.1    Introduction                                                                                   43

5.2      Summary                                                                                         43

5.3     Recommendations                                                                         44

5.4     Conclusion                                                                                       45

5.5     Suggestion for Further Studies                                                    45

References                                                                                                  46

Appendix                                                                                                   50

List of Tables/ Figures

1.                 Old Power Plants and Generation Capacities                     14

2.           Seven New Federal Government Power Projects in Niger Delta 15

3.                 Electricity Consumption (Mega Watts per hour)     16     

4.                 Comparative analysis of consumption of electricity worldwide 19

5.                 Summary statistics of variables                                            34

6.1      Unit Root at Levels                                                                     37

      6.2      Unit Root at First Difference                                                 27

      7.       Johansen Cointegration Test                                                       38

      8.       Static Regression Analysis                                                        40

      9.        Error Correction of the Growth Model                                41

List of figure

1        Trend in GDP and Electric Power Consumption in Nigeria              35

CHAPTER ONE

INTRODUCTION

1.1     Background to the Study

The growth, prosperity and national security of any country are critically dependent upon the adequacy of its electricity supply industry. Indeed, the link between electricity supply and economic growth is such that electric energy generation is not only a major and increasing source of energy; it is also for us a growth industry as well as ‘entirely new industry ’ (Okongwu,1986). Energy is a required input for production and consumption activities, making it indispensable source of economic growth. Nigeria is no exception. It is instructive to note that, electric power is vital for economic growth and quality of life not only because it fosters the productivity of capital, labour and other factors of production, but also that increased consumption of energy, particularly commercial energy like electricity signifies high economic status of a country (Adebola, 2011), These facts have attracted researchers to investigate the role of electricity in different countries.

However, Classical economists did not recognize electric energy as a factor of production and neither did the Neoclassical.  Today, economists like Alam (2006) as cited in Adebola (2011) finds out in his work on ‘Economic Growth with Energy’ that not only does energy serve as a factor of production; it also acts as a booster to growth of a nation. Thus, there is a departure from classical and neoclassical economics’ factors of production which include only capital, labour and technology to now include energy as a factor of production. It may be noted that electricity has effects not only on factors of production but also on the impact it has on capital accumulation. In literature, the relationships between electricity consumption and economic growth are well documented. However, debate regarding the causal relationship between electricity consumption and economic growth has attracted increasing attention in recent years. Emeka (2010) posits that the thrust of this debate has been whether electricity consumption causes economic growth or whether it is the economic growth that leads to electricity consumption. These causality issues, therefore, suggest the need to carry out further investigations.

Indeed, most studies linking electricity consumption to economic growth were conducted utilizing causality test for multi-country but fewer studies that establish the relationship between the two variables exist in literatures that employed cointegration technique for separate country as Nigeria. This study, therefore, will fill the gap.

Undeniably, Nigeria is presently faced with the challenge of providing sustainable, adequate, reliable and efficient electricity supply to residential, commercial and industrial consumers. This situation has adversely affected the social and economic life of the citizenry (Jonathan, 2010). The trend however, has often been constrained by perennial dismal energy supply plaguing this fledgling economy.  Like most economies in the West African sub-region, the country’s energy production rate continues to lag behind the rate of growth in demand from its industrial and services sectors (Adoghe, 2010; Igbinovia and Odiase, 2009; Iwayemi, 2008; Okongwu, 1986 to mention few). Although electric energy generation and supply difficulties in the country over the years are well documented, worsening supply conditions continue to heighten growing concerns in recent years about the ultimate impact of the condition on the nation’s long-term economic growth prospects and quality of life (Iwayemi,2008).

The foregoing provides the basis for examining the relationship between electricity consumption and economic growth in Nigeria.

1.2     Statement of the Problem

Electricity plays a very important role in the socio-economic and technological development of every nation. The electricity demand in Nigeria far outstrips the supply and the supply is epileptic in nature. The country is faced with acute electricity problems, which is hindering its development notwithstanding the availability of vast natural resources in the country. It is widely accepted that there is a strong correlation between socio-economic development and the availability of electricity. Given the situation above, the study seeks to examine the relationship between electricity consumption and economic growth in Nigeria.

1.3     Objectives of the Study

Generally, this study seeks to empirically examine the relationship between electricity consumption and economic growth in Nigeria.

However, it will:

1.                 Assess the profile of electricity consumption in Nigeria for the periods 1970-2009.

2.                 Examine the relationship between electricity consumption and economic growth in Nigeria.

1.4     Research Questions

The following questions will guide this study

 1.     What is the trend of electricity consumption in Nigeria from 1970 to 2009?

 2.     Does electricity consumption contribute to economic growth in Nigeria?

1.5     Hypothesis for the Study

This hypothesis was tested for the study

H0:    There is no significant relationship between electricity consumption and economic growth in Nigeria.

H1:    There is significant relationship between electricity consumption and economic growth in Nigeria.

1.6      Significance of the Study

The study is relevant in the true sense that it will help to improve the erratic supply of electricity to households, firms and government in the country. This study identifies the central role of electricity in the process of economic transformation. Electrical energy supply is not only a major and increasing source of energy; it is also for us a growth industry as well as ‘entirely new industry’ Therefore, this study will facilitate the effort of policy makers and government to make PHCN perform efficiently. The importance of vibrant powers sector is necessary because of the clamour in the need to attain sustainable development. Also this empirical study will be important for policy recommendation from the point of view of electricity consumption and economic growth for Nigeria and also for global panel. The study will help provide reliable service; improve efficiency and stimulate growth for small business that rely on electricity which can have huge impact on the lives of rural and urban dwellers by creating jobs.

Households,   firms and government will have to benefit from the study through improved quality, efficiency and reliability in electric supply. It will add literature to the existing field of energy economics.

1.7     Brief Methodology

The main focus of this study is to empirically examine the relationship between electricity consumption and economic growth in Nigeria. It adopts the descriptive and inferential methods to analyse the data. To complement the descriptive and analytical approaches mentioned above, the Ordinary Least Square was used. In this case one model was formulated and adequate econometric techniques adopted. The data set for this study is mainly secondary data. The secondary data comprises annual time series covering the periods1970-2009. All the data were sourced from the World Population Indicator (2012) and Central Bank of Nigeria Annual Statistical Bulletin (2009). In this study, the real GDP is expressed in terms of million Naira (the Nigerian currency) while electricity consumption is expressed in terms of Kilowatts per hour.

1.1       Plan of the Study

The study has been divided into five chapters. The first chapter provides the background of the subject matter justifying the need for the study. Chapter two presents related literature concerning the relationship between electricity consumption and economic growth in Nigeria. The theoretical framework and research methodology have been stated in chapter three while empirical result and discussion were made in chapter four. Concluding comments in chapter five reflect on the summary, conclusion and recommendations based on the findings of the study.

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