Demand for electricity: evidence of cointegration and causality from Sri Lanka

This study examines the cointegration and causality relationship between the demand for residential electricity and real income, average real electricity prices, real kerosene prices and real gas prices using annual data for the period, 1960-2007 in Sri Lanka. Error correction (EC) techniques and the Granger-causality (GC) approaches are employed. The long run income elasticity of demand, price elasticity of demand and kerosene price were estimated to be 0.78, -0.62, and 0.14 respectively. The short run elasticities for the same variables were 0.32, -0.16 and 0.10 respectively. The GC results detect bi-directional causality between electricity consumption and real income as well as electricity prices and its consumption. This suggests that these variables are determined jointly. Furthermore, one-way causality running from kerosene price to electricity demand was also found.