Open Access Journal Article

Macroeconomic Drivers of Electricity Prices in Nigeria

by Mansur Bala a,* orcid Nasir Ahmad Moyi a  and  Umar Muhammad Gummi a
a
Department of Economics, Sokoto State University, Sokoto, Nigeria
*
Author to whom correspondence should be addressed.
Received: 18 December 2023 / Accepted: 6 April 2024 / Published Online: 8 July 2024

Abstract

Electricity price volatility in developing economies, particularly Nigeria, presents a significant challenge to sustainable development. In this paper, we examine the macroeconomic drivers of electricity prices (ELP) in Nigeria based on annual data spanning 1980-2022 and the autoregressive distributed lag (ARDL) procedure. Our model estimates the long-run and short-run impacts of population growth (PG), economic growth (GDP), crude oil price (COPR), and electricity consumption (ELC) on electricity prices (ELP). The empirical findings reveal a positive and long-run effect of PG on ELP, indicating that rising demand from a growing population increases electricity prices. In the short-run, ELC surprisingly co-moved with ELP, which may be attributable to price-sensitive demand within specific consumer segments or periods. Furthermore, GDP and COPR exert positive effects on ELP, indicating that economic growth drives energy consumption and prices, and the cost-driven impact of fossil fuel dependence in electricity generation. These findings shed light on the complex interplay of demographic, economic, and energy market-related forces driving electricity prices in Nigeria. Therefore, the paper proposes some policy suggestions based on the empirical findings.


Copyright: © 2024 by Bala, Ahmad Moyi and Gummi. This is an open-access article distributed under the terms of the Creative Commons Attribution License (CC BY) (Creative Commons Attribution 4.0 International License). The use, distribution or reproduction in other forums is permitted, provided the original author(s) or licensor are credited and that the original publication in this journal is cited, in accordance with accepted academic practice. No use, distribution or reproduction is permitted which does not comply with these terms.

Share and Cite

ACS Style
Bala, M.; Ahmad Moyi, N.; Gummi, U. M. Macroeconomic Drivers of Electricity Prices in Nigeria. Energy Technologies and Environment, 2024, 2, 17. https://doi.org/10.58567/ete02030002
AMA Style
Bala M, Ahmad Moyi N, Gummi U M. Macroeconomic Drivers of Electricity Prices in Nigeria. Energy Technologies and Environment; 2024, 2(3):17. https://doi.org/10.58567/ete02030002
Chicago/Turabian Style
Bala, Mansur; Ahmad Moyi, Nasir; Gummi, Umar M. 2024. "Macroeconomic Drivers of Electricity Prices in Nigeria" Energy Technologies and Environment 2, no.3:17. https://doi.org/10.58567/ete02030002
APA style
Bala, M., Ahmad Moyi, N., & Gummi, U. M. (2024). Macroeconomic Drivers of Electricity Prices in Nigeria. Energy Technologies and Environment, 2(3), 17. https://doi.org/10.58567/ete02030002

Article Metrics

Article Access Statistics

References

  1. Adeniran, A. O., & Igbatayo, S. (2016). The impact of petroleum price volatility on Nigeria's economy. Institute for Oil, Gas, Energy, Environment and Sustainable Development. https://scholar.google.com/scholar?cluster=14697771314491833691&hl=en&oi=scholarr
  2. Blanca, M., Ana J, L., & María Teresa, G.-Á. (2012). The electricity prices in the European Union: The role of renewable energies and regulatory electric market reforms. Energy, 48(1), 307-313. http://dx.doi.org/10.1016/j.energy.2012.06.059
  3. Blundell, R., & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87(1), 115-143. https://doi.org/10.1016/S0304-4076(98)00009-8
  4. Brown, R., Durbin, J., & Evans, K. (1975). Techniques for testing the constancy of regression relationships over time. Journal of the Royal Statistical Society. Series B (Methodological), 149-192. http://www.jstor.org/stable/2984889?origin=JSTOR-pdf
  5. Caroline, B. (2022, July 30). Theory of price. Investopedia. Retrieved February 10, 2022, from https://www.investopedia.com/terms/t/theory-of-price.asp
  6. Doris, D. S. (2023). Share of population with access to electricity in Nigeria 2011-2021. Statista. https://www.statista.com/statistics/1307416/total-population-access-to-electricity-in-nigeria
  7. Energy Information Administration. (2022, April 20). U.S. Energy Information Administration. Retrieved from https://www.eia.gov/
  8. Engle, R., & Patton, A. (2007). What good is a volatility model? Quantitative Finance, 1(2), 237-245. https://doi.org/10.1016/B978-075066942-9.50004-2
  9. Erkan, E. (2011). The impact of power market reforms on electricity price-cost margins and cross-subsidy levels: Across country panel data analysis. Energy Policy, 39(12), 1080-1092. http://dx.doi.org/10.1016/j.enpol.2010.11.023
  10. Eydeland, A., & Wolyniec, K. (2003). Energy and power risk management: New developments in modeling, pricing, and hedging. (2nd ed.). John Wiley & Sons. https://www.wiley.com/en-ie/search?filters[author]=Alexander%20Eydeland&pq=++
  11. Girish, P. G., & Vijayalakshmi, G. (2013). Determinants of electricity price in the competitive power market. International Journal of Business and Management, 8(21), 70-75. http://dx.doi.org/10.5539/ijbm.v8n21p70
  12. Goutam, D., & Krishnendranath, M. (2017). A literature review on dynamic pricing of electricity. Journal of the Operational Research Society, 68(10), 1131-1145. https://ideas.repec.org/a/pal/jorsoc/v68y2017i10d10.1057_s41274-016-0149-4.html
  13. Hadsell, L., Marathe, A., & Shawky, H. A. (2004). Estimating the volatility of wholesale electricity spot prices in the US. The Energy Journal, 25(4), 23-40. https://ideas.repec.org/a/aen/journl/2004v25-04-a02.html
  14. Harris, C. (2006). Electricity markets: Pricing, structures and economics. John Wiley & Sons. https://www.perlego.com/book/1009703/electricity-markets-pricing-structures-and-economics-pdf
  15. Karakatsani, N. V., & Bunn, D. W. (2004). Modeling the volatility of spot electricity prices. International Journal of Forecasting, 24(5), 764-785. https://api.semanticscholar.org/CorpusID:27454378
  16. Kirschen, D., & Strbac, G. (2004). Fundamentals of power system economics. John Wiley & Sons. http://dx.doi.org/10.1002/0470020598
  17. Knittel, C. R., & Roberts, M. R. (2015). An empirical examination of restructured electricity prices. Energy Economics, 27(5), 791-817. Retrieved from https://ideas.repec.org/s/eee/eneeco.html
  18. Li, K., Cursio, J. D., Sun, Y., & Zhu, Z. (2019). Determinants of price fluctuations in the electricity market: a study with PCA and NARDL models. Economic Research-Ekonomska Istraživanja, 32(1), 2404–2421. https://doi.org/10.1080/1331677X.2019.1645712
  19. Longstaff, F. A., & Wang, A. W. (2004). Electricity forward prices: A high-frequency empirical analysis. Journal of Finance, 59(4), 1877-1900. http://dx.doi.org/10.1111/j.1540-6261.2004.00682.x
  20. Mahadeva, L., & Robinson, P. (2004). Unit root testing to help model building. Handbooks in Central Banking No. 22 Centre for Central Banking Studies, Bank of England, London. Retrieved from http://www.bankofengland.co.uk/education/Pages/ccbs/handbooks/ccbshb22.aspx
  21. Nagayama, H. (2007). Effects of regulatory reforms in the electricity supply industry on electricity prices in developing countries. Energy Policy, 3440-3462. http://dx.doi.org/10.1016/j.enpol.2006.12.018
  22. Nigerian Electricity Regulatory Commission (NERC). (2021, November 12). Electricity meter prices go up. PM NEWS Nigeria. Retrieved from https://pmnewsnigeria.com/2021/11/12/electricity-meter-prices-go-up/
  23. Oiol, P. (2019, May 20). Solar energy. Retrieved December 2022, from Solar-energy. technology: www.ectronicalfunderblog.com
  24. Ologbenla, P. (2021). Determinants of domestic energy prices in Nigeria (1980-2020). Obafemi Awolowo University, Ile Ife, Osun State, Nigeria, 3(2), 305-311. https://doi.org/10.25082/REE.2021.02.006
  25. Ologundudu, M. M., & Abioro, M. A. (2018). Petroleum pump price increase and business environment: The Nigerian Economy Standpoint. IOSR Journal of Business and Management (IOSR-JBM), 20(3), 60-70. http://dx.doi.org/10.9790/487X-2003046070
  26. Patrícia, S. P., & Cerqueira, P. A. (2017). Assessing the determinants of household electricity prices in the EU: A system-GMM panel data approach. Renewable and Sustainable Energy Reviews, 1131-1137. https://ideas.repec.org/a/eee/rensus/v73y2017icp1131-1137.html
  27. Pesaran, M. H., Smith, R. J., & Shin, Y. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3), 289-326. https://doi:10.1002/jae.616
  28. Ralf, B., Stan, H., & Vlad, P. (2007). Modeling spikes in electricity prices. The Economic Record, 83(263), 371-382. http://dx.doi.org/10.1111/j.1475-4932.2007.00427.x
  29. Ricardo, D. (1817). On the principles of political economy and taxation. London: John Murray. https://www.scirp.org/reference/referencespapers?referenceid=1986007
  30. Smith, A. (1776). An inquiry into the nature and causes of the wealth of nations. Clarendon Press, the Glasgow Edition of the Works and Correspondence of Adam Smith. ttps://www.econlib.org/library/Smith/smWN.html
  31. Sonal, G., Deepankar, C., & Hiranmoy, R. (2020). Electricity prices determinants: India's perspective. International Journal Business Excellence, 549-560. http://dx.doi.org/10.1504/IJBEX.2019.10019286
  32. Sorokin, S. Rebennack, P. M. Pardalos, N. A. Iliadis, & M. V. F. Pereira (Eds.), Handbook of Networks in Power Systems I (pp. 89-121). Springer. http://dx.doi.org/10.1007/978-3-642-02493-1
  33. Steiner, F. (2001). Regulation, industry structure and performance in the electricity supply industry, OECD Economics Studies. OECD. http://dx.doi.org/10.2139/ssrn.223648
  34. Stephanía, M.-L., & Anjali, N. (2019). Drivers of electricity price dynamics: Comparative analysis of spot and futures markets. Energy, 76-87. http://dx.doi.org/10.1016/j.enpol.2018.11.020
  35. Sule, A. G. (2005). Short note on the history of capitalist and socialist economic thought (2nd ed.). October.
  36. Umar, H. A., Mathias, F., & Praisad, R. (2022). Towards sustainability of power utilities in Nigeria: A Bayesian network approach. International Journal of Information Technology, 14(2), 14-27. http://dx.doi.org/10.1007/s41870-022-00876-2
  37. Weron, R. (2006). Modeling and forecasting electricity loads and prices: A statistical approach. John Wiley & Sons. https://doi.org/10.1002/9781118673362
  38. Weron, R., & Misiorek, A. (2008). Forecasting spot electricity prices: A comparison of parametric and semi-parametric time series models. International Journal of Forecasting, 24(5), 744-76. http://dx.doi.org/10.1016/j.ijforecast.2008.08.004
  39. Windermeijer, F. (2005). A finite sample correction for the variance of linear efficient two-step GMM estimators. Journal of Econometrics, 126, 25-51. https://doi.org/10.1016/j.jeconom.2004.02.005
  40. Xiao, Y., Colwell, D. B., & Bhar, R. (2015). Risk premium in electricity prices: Evidence from the PJM market. Journal of Futures Markets, 35(8), 776-793. https://doi.org/10.1002/fut.21681
  41. Zareipour, H., (2012). Short-term electricity market prices: a review of characteristics and forecasting methods. In: Sorokin, A., Rebennack, S., Pardalos, P.M., Iliadis, N.A., Pereira, M.V.F. (Eds.), Handbook of Networks in Power Systems I. Springer, pp. 89–121. http://dx.doi.org/10.1007/978-3-642-23193-3_4
  42. Zareipour, H., Bhattacharya, K., & Cañizares, C. A. (2007). Electricity market price volatility: The case of Ontario. Energy Policy, 35(9), 4739-4748. https://doi.org/10.1016/j.enpol.2007.04.006