ABSTRACT
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.
CHAPTER
ONE
INTRODUCTION
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;
iexamine
the structure and pattern of electricity generation in Nigeria.
ii
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
iii
evaluate the short run influence of electricity consumption, gas consumption,
installed electricity capacity, price of electricity, economic growth, rainfall
on electricity generation
iv
investigate the extent to which electricity generation responds to shocks and
or innovations from its dynamics in the system
v
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.
1. Ho1:
There is no significantlong 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.
2. 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.
3 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.
4. 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 testand 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.
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