Estimation of household demand for electricity in Sri Lanka: a cointegration analysis

This study uses cointegration analysis to estimate the long-run and the short-run elasticity of demand for electricity in Sri Lanka. The long-run demand elasticities of income, own price, and kerosene price were estimated to be 0.83, −0.75, and 0.15 respectively, while the short-run elasticities for the same were 0.43, −0.58, and 0.11. The error correction model indicates that when demand is above or below its equilibrium level, consumption adjusts by 21% within the first year. The inelastic price of electricity indicates that a price increase is not a very effective tool for energy conservation or demand management. It further suggests that removal of subsidy on electricity can be achieved without reduction in revenue for the electricity board. The long-run income elasticity indicates that potential future income increases will result in a significant increase in electricity demand. Therefore, the existing power generation plans, which only consider current average per capita consumption and population growth need revisions.