A Panel Data Analysis of Electricity Demand in Pakistan

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This paper looks at the economy-wide demand and the firm level demand for electricity in Pakistan. The economy wide estimation of electricity demand uses panel data from 63 countries from 1998-2008, and finds that the elasticity of demand for electricity with respect to per capita income is approximately 0.69, which implies that a 1% increase in per capita income will lead to a 0.69% increase in the demand for electricity. The firm level analysis uses firm level data from the World Bank's Enterprise Survey for Pakistan and finds that the price elasticity of demand for electricity across all firms is approximately -0.57, which implies that a 1% increase in electricity prices will lead to a 0.57% decrease in electricity demand across firms. Across sectors, the textile sector has the highest price elasticity of demand (-0.81) while the price elasticity of demand for firms in the electricity and electronics sector is the smallest (-0.31). Finally, firm level data is also used to estimate production functions in order to estimate the impact of electricity shortages on manufacturing output.

Keywords: Electricity, demand, industrial, price elasticity, Pakistan.

JEL Classification: Q41, E39, E01.

(ProQuest: ... denotes formulae omitted.)

I. Introduction

In a period in Pakistan's economic history when the amount of electricity generated has fallen far short of the economy-wide demand, an analysis of electricity demand is critical both for understanding why the country has reached this point and for determining future policy measures to tackle this shortage. Although the topic of electricity demand in Pakistan is vast, this paper looks at the economy-wide demand for electricity and also focuses on industrial-level demand.

The questions that this paper attempts to answer are questions that the average Pakistani, the Pakistani business community, and Pakistani policymakers are attempting to answer: What will be the economy-wide demand for electricity in the coming years? What impact will higher electricity prices have on industrial demand for electricity? How does electricity affect industrial level output? Each question is a topic on which vast research is possible, but this paper looks at each using two unique datasets.

Most analyses that try to determine future electricity demand in Pakistan focus on time series data for Pakistan. This paper takes a different approach: Instead of just focusing on Pakistan, why not use historical data to see how electricity demand has grown over time in other countries? Using a unique panel dataset for 66 countries over 10 years taken from the International Energy Agency (IEA) and the Penn World Tables, the relationship between income per capita and electricity consumption per capita is estimated. This is then used to predict the growth in electricity demand in Pakistan over the next 5-10 years.

The second set of analyses using data taken from the World Bank Enterprise Surveys for Pakistan to construct a panel dataset for 402 firms over 4 years. This dataset is used to determine the elasticity of electricity demand with respect to the price of electricity across firms in Pakistan. This can be used to gauge the impact of industrial electricity price increases on the demand for electricity in the Pakistani industrial sector. This dataset is also used to estimate the production function for Pakistani firms; this estimation uses a production function that not only includes the usual factors of production, labor, and capital, but also includes electricity. With these results, one can estimate the impact of reductions in electricity supplies on industrial output.

The setup of the paper is as follows: Section II provides a brief background on electricity production and prices in Pakistan, and compares it with other countries. Section III uses the IEA dataset to estimate the elasticity of electricity consumption per capita with respect to real income per capita. …