Estimating short and long-term residential demand for electricity : new evidence from Sri Lanka

Abstract

This study investigates the short-run dynamics and long-run equilibrium relationship between residential
electricity demand and factors influencing demand - per capita income, price of electricity, price of kerosene
oil and price of liquefied petroleum gas - using annual data for Sri Lanka for the period, 1960-2007. The
study uses unit root, cointegration and error-correction models. The long-run demand elasticities of income,
own price and price of kerosene oil (substitute) were estimated to be 0.78, - 0.62, and 0.14 respectively. The
short-run elasticities for the same variables were estimated to be 032, - 0.16 and 0.10 respectively.
Liquefied petroleum (LP) gas is a substitute for electricity only in the short-run with an elasticity 0.09. The main findings of the paper support the following (1) increasing the price of electricity is not the most
effective tool to reduce electricity consumption (2) existing subsidies on electricity consumption can be
removed without reducing government revenue (3) the long-run income elasticity of demand shows that any future increase in household incomes is likely to significantly increase the demand for electricity and(4) any power generation plans which consider only current per capita consumption and population growth should be revised taking into account the potential future income increases in order to avoid power shortages ill the country.