Empirical Analysis of the Causal Relationship Between Electricity Consumption and Economic Growth in Nigeria

Abstract

This paper investigates the relationship between electricity consumption and real GDP growth in Nigeria during a period of thirty six years (1970-2005). The paper adopts Vector Auto Regressive (VAR) and Error Correction Model (ECM) to test the causality between real GDP and electricity consumption. The order of integration of the two variables was determined using Augmented Dickey Fuller (ADF) test which was followed by co-integration and causality test. The result shows that there is unidirectional causality from real GDP to electricity consumption without a feedback effect. This could be attributed to the low level of electricity consumption, engendered by low level of electricity generation, which is too small to cause economic growth. There is need for government to diversify the energy mix to include all the untapped potentials of renewable power options such as small hydro, wind, solar and biomass among others in all the states and local constituencies. Energy wastages should be curtailed through proper efficiency measures and different pricing system. It is also suggested that government should make policies which will create an enabling environment for the private sector to generate electricity from renewable sources in terms of fiscal incentives such as tax rebate, subsidies and low import duties for the imported equipment among others. Furthermore, there is a need to review the 2003 National Energy Policy so as to come up with a sound, robust and technological energy policy that will be able to solve the challenges of the electricity sector. Political commitment through investment in energy infrastructures and capacity building of the citizens in renewable energy technologies are critical towards the improvement of electricity generation, which could then cause electricity consumption to have a significant impact on economic growth in Nigeria.