Modelling sectorwise electricity demand in Sri Lanka using vector error correction analysis

Abstract

Electricity demand in Sri Lanka is mainly categorized into three main sectors as Domestic, Industrial and Commercial and the factors affecting on electricity demand may vary from sector to sector. Various methods have been developed to predict electricity demand for sector wise by many authors. The objective of this study is also model the sector wise electricity demand considering the quarterly data of Gross Domestic Product (GDP), Exchange Rate (USD) and Electricity Price (X1) ( 1994-2007) using Vector Error Correction analysis. Dickey Fuller test confirmed that each series were non stationary. The Granger Causality test was applied to find the direction of causality between electricity demand (Yt) in each sector and GDP, USD and X1. Cointegration test is used to identify linear combination of the integrated series for which is the best define for long run equilibrium relationships between the variables. Three separate VEC models were identified for each sector. By using the plots of histogram, Autocorrelation Function (ACF) and Augmented Dickey Fuller Test (ADFT) confirmed and that the errors of each models as random. Further, it was found each model less than 5% Mean Absolute Percentage Error for the data used. Three main factors are identified as the significant contribution to electricity demand in Sri Lanka. Gross Domestic Product is the most important factor for electricity demand for three sectors as GDP of lag1, 2 and 3 found as significant variables for three sectors. Exchange rate only affects for the Domestic and Commercial sectors electricity demand and they can be described using one, two and three lag values of USD. There is no affect from electricity price on commercial sector electricity demand. Domestic sector electricity demand depends on one, two and three lag values of electricity price and Industrial sector electricity demand depends on two and three lag values of electricity price. The results obtained this study is useful for the awareness on the impacts of different external variables and so to set up the effective business strategy in the changing business environment.