CAUSATIVE FACTORS INFLUENCING ELECTRICITY GENERATION IN NIGERIA: AUTO REGRESSIVE DISTRIBUTED LAG AND VECTOR ERROR CORRECTION MODEL APPROACHES
This study explored causative factors influencing electricity generation in Nigeria from 1970 -2015 using advanced econometric techniques. The objective of the study is to identify causative factors that influenced electricity generation in Nigeria. To achieve this, the study employed auto regressive distributed lag (ARDL) and vector error correction model (VECM) approach. It employed the ARDL to capture the long and short run changes in the variables and it used the VECM to capture the impulse response of the variables and the variance error decomposition to obtain the reaction of the variables to errors committed in forecasting them. The study found no significant relationship between observed variables and electricity generation in the short run. Further findings included a significant and direct relationship between electricity consumption, gas consumption, installed electricity capacity, economic growth and a significant but indirect relationship between price and electricity generation in the long run. The results also revealed direct and insignificant relationship between annual rainfall, and electricity generation in the long run. The responds of electricity generation to shocks from other variables in the model are relatively low and sluggish. In forecasting electricity generation, error due to gas consumption is the highest followed by error due to installed capacity of electricity. There is a unidirectional causality running from electricity generation to economic growth, installed capacity and gas consumption and an independent causality between electricity generation, electricity consumption, price of electricity, and rainfall. The study recommends the increase in electricity generation through increased installed capacity of electricity, electricity consumption, and price of electricity, economic activities, gas consumption and the construction of small hydro stations in all local government areas of the country.
1.1 Background to the study
A prerequisite for sustainable economic growth and development is the availability of sufficient supplies of affordable electricity and development is a necessary condition for achieving the standard of living to which most economies of the world aspire to attain. The availability of quality electricity to the citizenry in an economical and accessible fashion guarantees enhanced standard of living. According to Carlos and Jonathan (2010) energy is at the heart of economic growth and development in every economy. It moves us and powers our factories, government and office buildings, schools and hospitals. It heats homes and keeps perishable foods cold and warm.
Energy is the source of wealth and competition, the basis of political controversy and technological innovations and the core of an epochal challenge on our global environment. Human economies – the production, exchange and consumption of goods and services are driven by refinements in ways of capturing and harnessing energy resources (Carlos and Jonathan, 2010). The growth of economies has been closely linked with the availability, extraction, distribution and use of energy. Indeed, there is a close relationship between energy consumption and economic development (Judson, Schmalensee, & Stoker 1999). Electricity is the corner stone on which the economy and the daily lives of Nigerians depend (Aderibigbe, 2010). The flexible nature of electricity makes it a form of energy critical for modern life and the growth of national economies. The extensive demand for sustainable electricity in all economies is driven by such critical factors such as urbanization, population growth, industrialization, modernized agriculture and rising standard of living. Though electricity is a secondary form of energy, its adequate production is central in the socio-economic and technological development of any nation-state including Nigeria.
The provision of adequate, affordable, accessible and sustainable electricity supply is critical to the attainment of the broad goals of high and sustainable human development. Electricity interacts with human development at different levels. It helps facilitate economic development and poverty reduction by underpinning industrial growth and enhancing productivity. It contributes to social development by helping to fulfill the basic human needs of nutrition, warmth and lightning, in addition to education and public health (United Nations Development Programme, 2005) (as cited in Presidential Advisory Committee 2006). Sanchis (2007) argued that increased electricity will prevent the paralyzation of the industrial production. The ability of a nation to develop its available resources and the attainment of economic development is linked to adequate generation and distribution of energy especially electricity. Hence, insufficient electricity supply has been identified as the major constraint to industrialization and economic development in Nigeria. Modern technologies used in design, production and delivery are electricity driven, hence, electric power supply is a basic infrastructure requisite for industrialization. This brings to fore why adequate electricity use has taken center stage in every developmental discourse in Nigeria in the last two decades and half (1990’s).
According to Ayodele (2004) apart from serving as a pillar of wealth creation in Nigeria, electricity is also the nucleus of operations and subsequently the engine of growth for all sectors of the economy. He further posited that the quest to rapidly and firmly put the Nigerian economy on course of economic development is technically, a function of adequate and distribution of energy, particularly electricity.
The quantity and quality of electricity consumed by consumers is a function of the quantity of it produced. Changes in household’s lifestyles, technology import and increased productivity, and the growing commercial activities have increased the demand for electricity and are significant to induce electricity generation. In Nigeria, consumers of electricity are conventionally classified into three major groups namely: residential sector, commercial sector and street lighting, and industrial sector.
A residential electricity consumer is one who uses his premises exclusively as a residence. The demand for electricity here is mainly for cooking, heating and lighting. Nigerian families represent a much higher percentage of the total final electricity consumption in the country. The clement of Nigerian climate is the key factor in determining electricity consumption by this sector. Energy consumption of Nigeria households is much lower in heating. A growing consumption from appliances such as air conditioning, lighting, refrigerating and cooking is relatively more prominent than heating. The Nigerian residential electricity demand has grown steadily over the years more than that of any other consumer. The main reasons for this growth may not be unconnected to economic advances and increase in number of houses and size of families orchestrated by population growth, thus, the more individuals living in a unit, the more electricity consumption by it. Apart from increase in the number and size of families, a household may decide to change from traditional energy such as fuel-wood to using modern energy which is more convenient and environmentally friendly like electric cookers and other heating systems. Many households for instance, due to urbanization and economic advancement have made switching decision to step up the energy ladder thereby shifting from fire wood and kerosene to other forms of energy such as electricity and gas. Undoubtedly, this switching decision will also bring about a significant increase in household’s electricity consumption.
Ayodele (1978) and Babatunde and Shauibu (2009) have shown that residential electricity is a normal good, hence, its consumption increases as income increases. This indicates that the residential electricity consumer increases consumption by increasing stock of electricity equipment like, refrigerators, air conditioners etc. However, Keynes (1936) in his psychological law of consumption states “Consumption does not increase as much as income increases”. Keynes postulated that the marginal propensity to consume (MPC), the rate of change of consumption for a unit (for instance naira) change in income is greater than zero but less than one (0 < MPC < 1). This implies that the consumer may spend on consumption less than the increase in income, hence the tendency of the consumer to save part of the increased income. In the Keynesians analysis therefore, increase in residential electricity consumption in Nigeria may not be as a result of increased income only (especially when the power supply is epileptic), but will include factors like creation of states and local governments and increase in population.
This study observes that these factors should also have influenced positively electricity consumption in both industrial and commercial sectors. The study attributes the imbalance here to inadequate generation and supply management.
Commercial electricity consumers are those who use their premises for any purpose other than exclusively as a residence or as a factory for manufacturing goods. They include hospitals, government research institutes and educational institutes, water boards, religious houses, agro allied industries and other artisans whose contribution cannot be undermined. But due to inadequate power supply, activities in many research institutes (universities inclusive) are paralyzed leaving the research institutes as theory centers. Endogenous growth theorists state that investment in research and development is the most important source of technological progress. This means that technological advancement is a product of research and development and it is a technical and direct function of electricity.
The industrial consumer of electricity is one who uses his premises for the manufacturing of goods including welding and ironmongery. Found here are establishments with heavy equipment and modern technologies for mass production of goods. Most of these technologies are dependent on the availability of quality electricity to power them; hence without adequate electricity supply these technologies would remain underutilized. This study is of the opinion that this may be connected to the reasons why most heavy firms have stopped production in Nigeria while those remaining produce marginally because of high cost of generating private electricity. Most firms in Nigeria rely on auto production of electricity as the major source of electricity supply while electricity supply from public electric power suppliers is used as a back-up. According to Ekpo (2010) about 90% of the firms in Nigeria have their own private electric generators. The World Bank survey of Nigerian firms in the year, 2002, (as cited in Ekpo, Chuku & Effiong, 2011) showed that 95.7, 98.2 and 98.2% of business firms located in the north, east and south west of Nigeria respectively owned private generators. In average, about 97.1% of business firms located in Nigeria owned and operate private generator.
The connotation of these is that greater electricity generation translates into greater economic activities which will in turn result to an enhanced economy. Electricity, therefore, is very important for economic growth, national development and enhanced standard of living. Economic history plainly reveals that electricity serve as conduit to economic growth and development. In fact, the level of electricity usage or consumption closely pictures level of economic growth and by extension development. To attain sustainable energy development therefore, requires the application of the principles of sustainable development to the energy sector- this includes the efficient use of human, financial and natural resources on the generation or production of electricity.
1.2 Statement of the Problem
Energy literature in Nigeria showed that most of the studies carried out on electricity is on consumption. Production of any commodity becomes important considering the fact that it precedes consumption as such there may not be consumption without production. A fall in production of electricity reduces its consumption by all economic units, hence a reduced standard of living of consumers. Literature revealed that studies on electricity generation in Nigeria ranges from electricity generation projection to appropriate energy mix, production index of electricity and consumption, factors responsible for poor electricity services, the relationship between electricity supply and manufacturing sector performance and problems and challenges of electricity generation (see Appendix 5).
To determine appropriate energy mix and the relationship between electricity generation and manufacturing sector performance, demands the understanding of generation system and the factors that influences it. This study believed therefore, that identifying and studying the causative factors that influenced electricity generation becomes very important especially to Nigeria as it desires to be among the twenty (20) leading economies by the year 2020 as well as the place of electricity in modern existence.
Among the considered literature, only Sule (2010), Emovon, Bakare and Adeyeri (2010), and Ubi, Effiom, Okon and Oduneka (2012) focused on factors affecting electricity generation, problems of electricity generation and determinants of electricity supply in Nigeria respectively. The studies of Sule (2010) and Emovon et al (2010) were based on content analysis, hence, did not employ any econometric technique to establish the long run and short run relationship that existed among the identified variables. For instance, Sule (2010) identified non-diversification of energy sources, poor maintenance culture, transmission losses, kidnapping, the absence of research and development, competition, low level of annual rainfall as factors affecting generation, transmission and distribution of electricity in Nigeria.
Although Sule’s study was on electricity generation, distribution, and transmission, no distinction was made on how these factors identified affect the dependent variable neither did any relationship or interaction among the variables established. Emovon et al (2010) made use of questionnaire to obtain problems of electricity generation to include; poor maintenance planning, inadequate funding, poor electricity pricing, monopoly poor, energy mixing, inadequate gas supply, vandalization and drought. They were ranked according to the responses without the use of any statistical or econometric tool to establish the relationship and causality that exists among the variables. Although Osobase and Bakare- Aremu (2014) employed an econometric technique (OLS), the study only focused on causality and no long run and short run relationship between the variables is shown and the study is directed to study electricity supply and the manufacturing sector performance. The study of Ubi, Effiom, Okon and Oduneka (2012) also employed the OLS technique but not Vector error correction model or Auto regressive distributed lag techniques and did not include variables such as electricity installed capacity, electricity consumption, gas consumption, and economic growth in their model. Their study spanned from 1970 -2009.
The importance of obtaining relationships among variables in an economic study of this magnitude cannot be overstressed. Apart from showing relationships and sometimes direction of causality, it aids policy making and forecast or projection. Again, these studies are not supported by any known theory. The essence of theoretical background for researches of this nature, apart from making them academic, is to reinforce the universality of the concepts studied and the acceptability of the findings. Also very worthy of note is the fact that some these studies were of a single period consideration, hence they did not cover a period of time.
This study therefore, is theoretically and empirically based and employed appropriate econometric techniques such as the auto regressive distributed lag and the vector error correction model approaches and ensured that robust diagnostic tests were carried out as well as covered the period between 1970 to 2015; hence the most recent to the best of our knowledge on the causative factors influencing electricity generation in Nigeria.
1.3 Objectives of the Study
The overall aim of the study was to examine the causative factors influencing electricity generation in Nigeria.
Other specific objectives were to;
- Examine the structure and pattern of electricity generation in Nigeria.
- Examine the long run influence of electricity consumption, gas consumption, and installed electricity capacity, price of electricity, economic growth, and rain fall on electricity generation
- Evaluate the short run influence of electricity consumption, gas consumption, installed electricity capacity, price of electricity, economic growth, rainfall on electricity generation
- Investigate the extent to which electricity generation responds to shocks and or innovations from its dynamics in the system
- Identify the direction causality between the influencing factors and electricity generation in Nigeria.
1.4 Research Hypotheses
This section focused on presenting testable hypotheses for the study based on the drawn objectives.
- Ho1: There is no significant long run relationship between electricity consumption, gas consumption, and installed electricity capacity, price of electricity, economic growth, and rainfall and electricity generation in the long run.
- Ho2: There is no significant short run relationship between electricity consumption, gas consumption, and installed electricity capacity, price of electricity, economic growth, and rainfall and electricity generation.
- Ho3: Electricity generation does not respond to shocks and or innovations from electricity consumption, gas consumption, installed electricity capacity, price of electricity, economic growth, and rainfall.
- Ho4: there is no bi-causality between the explanatory variables and electricity generation.
1.5 Justification for the Study
The justification for every research is the problem it seeks to solve and its contributions to knowledge as well as to policy making. To this end, this research was set to examine, given the poor electricity generation in Nigeria, the causative factors that influenced it and its attendant socio-economic implications. Literature revealed that there was no in depth research in Nigeria that had considered the causative factors influencing electricity generation from 1970 to 2015 employing VECM and ARDL econometric techniques. For instance, Emovon et al (2010) employed the use of questionnaire to investigate problems of electricity generation in Nigeria. The study did not show any econometric relationship among the factors identified. Having considered related studies in Nigeria, (see Appendix 5) only studies by Sule (2010) and Emovon, Kareem and Adeyeri (2010) were directed towards studying factors affecting electricity generation in Nigeria. None however carried out a detailed econometric analysis to show the relation that exists between electricity generation and the factors that influences it. These studies engaged in content analysis of the major factors affecting electricity generation, transmission and distribution in Nigeria and power generation in Nigeria; Problem and Solution respectively.
Although the studies of Ijaiya, (nd) and Osobase, Bakare and Tunde (2014) employed the Ordinary Least Squares technique, the studies did not carry out vital and relevant diagnostic tests like the, serial correlation test, con-integration test, stability test and are not specifically on electricity generation. Ubi, Effiom, Okon and Oduneka (2012) also employed the OLS technique but not Vector error correction and Auto regressive distributed lag techniques and did not include variables such as rainfall, installed capacity, electricity consumption, gas consumption, and economic growth in their model. Their study spanned from 1970 -2009.
In developing countries, no study was specifically directed to study factors influencing electricity generation except for Emmanuel and Fredrick (2013), Omar and Emad (2009) and Halil and Melike (2013) (see Appendix 6). While Emmanuel and Fredrick employed the probability of exceedence to establish the hydrologic drought period in Ghana, Omar and Emad used fuzzy logic methodology to obtain the best site for wind energy production in Jordan. Halil and Melike employed the ARDL technique in Turkey.
In developed countries like the UK and Italy, Eteng (2010) adopted the vector auto-regression technique, Bayraktutan, Yilgor, and Ucak, used OLS -adopting Panel data approach while Antonio, Jose, and Tiago (2015) employed the ARDL technique for their studies (see Appendix 7) respectively.
This study therefore, employed the vector error correction model and autoregressive distributed lag approaches to study causative factors influencing electricity generation in Nigeria. Again, no study in Nigeria to the best of our knowledge had adopted these techniques to study electricity generation and its dynamics in Nigeria from 1970 to 2015. Therefore a test of these techniques in Nigeria became necessary using Nigeria’s data. Also very essential is the contributions of the study to energy literature as well as to policy making.
1.6 Scope of the study
This study is on causative factors that influences electricity generation in Nigeria. It was limited to factors such as electricity consumption, price of electricity, installed capacity of electricity, economic growth, and rainfall on electricity generation in Nigeria without any focus on transmission and distribution. With the dominance of hydro and thermal electricity sources and the non-development of other renewable electricity sources such as wind, solar, biomass and so on in Nigeria electricity system, and this study did not consider any other renewable electricity source other than hydro; hence the direction of this study was on hydro and thermal electricity generation in Nigeria from 1970 -2015. Again, this study ignored the scientific contents of electricity generation and concentrated purely on economics and econometrics.
1.7 Structure of the Study
The work is divided into five chapters. Chapter one was the introduction which consisted of the statement of the problem, objectives of the study, hypotheses formulated and tested, justification of the study, scope of the study and organization of the study. Chapter two focused on the review of related literature. Chapter three focused on research methods and theoretical framework. Chapter four dealt with data presentation and discussions of results; while chapter five presented the summary, conclusion and recommendations.