Factors behind electricity intensity and efficiency: An econometric analysis for Pakistan

Abstract

In Pakistan, electricity intensity has increased sharply since 1970's. This study combines decomposition and econometric analysis to examine the socio-economic determinants of increasing electricity intensity in Pakistan. Using Fisher Ideal Index, it is observed that the intensity increase is primarily due to efficiency changes. The econometric analysis indicates that per capita income is the main factor that has increased the electricity intensity through efficiency deterioration, while higher education improves electricity efficiency. The electricity price has ineffective role in changing electricity intensity; may be due to the fact that price is not allowed to adjust to costs changes. On the other hand, the prices of substitutes turn-out to be highly significant; electricity and gas consumption substitutes while oil use is complementary to electricity. This implies that education is better placed to impart awareness among the people about the severe electricity crisis in Pakistan. Moreover, the findings that prices have no significant effects on activity mix imply that energy prices may be deregulated to improve efficiency. Additionally, if government wants to use price as a tool to improve efficiency through interventionist approach, then it has to take care of the possible substitutability among different energy sources. Keywords: Electricity intensity, Decomposition, Prices of substitutes, Pakistan