The Dynamics of Demand and Supply of Electricity in Nigeria

Abstract

This paper presents an empirical analysis of the demand and supply of electricity in Nigeria. The analysis was performed using annual times series data for the period 1970 to 2012. For this purpose, we estimated the long–run demand and supply equations for electricity using the reduced form regression method (RFRM) and the Vector error correction method (VECM) approach. Our analysis revealed that the theoretical modeling requirements rather than the simplified reduced form regression in the simultaneous equation system to satisfy the statistical requirements determine the choice of the statistical model. The results from the estimated model in terms of individual parameters in the system revealed that both price and income are demand elastic. As such, increasing electricity price in Nigeria would lead to a reduction in revenue by Power Holding Company of Nigeria (PHCN). The study also show that PHCN is currently experiencing diseconomies of scale as a result of inefficiency, inability to innovate as well as the necessary knowledge needed to expand output so as to reduce average cost. Similarly, the paper posits that the current reform in the electricity sector would only lead to increase in average unit cost and hence the price of electricity. We therefore recommend that for the Nigerian electricity sector to be viable as well as meet the supply and demand needs of both the private, commercial and industrial sector of the economy, the government at all levels, policy and decision makers must take stringent measures to curtail the problem of inefficiency, lack of manpower, be able to innovate so as to reduce wastage to its lowest web. This will not only bolster the growth of the Nigerian economy but will also be a source of revenue for the government for its infrastructural development needs.

Keywords: Electricity demand and supply, Annual data, Simultaneous equation method and Vector error correction method (VECM)