Demand of Electricity Modeling In Saudi Arabia

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The Electricity Journal
journal homepage: www.elsevier.com/locate/tej
Electricity demand modeling in Saudi Arabia: Do regional differences matter?
Jeyhun I. Mikayilova,b,*, Fakhri J. Hasanova,c, Waheed Olagunjud, Mohammad H. Al-Shehrie
a King Abdullah Petroleum Studies and Research Center, PO Box 88550, Riyadh, 11672, Saudi Arabia b Azerbaijan State University of Economics (UNEC), Istiqlaliyyat Str., 6, Baku, Azerbaijan c The George Washington University, 2115 G Street, NW, Washington, DC, 20052, USA d Ministry of Energy, King Saud St., Al Wizarat, Riyadh, 12622, Saudi Arabia e Saudi Electricity Company, Takhassusi St., Riyadh, 12333, Saudi Arabia
A R T I C L E I N F O
Keywords: Electricity demand Price elasticity Cointegration Regions Saudi Arabia
A B S T R A C T
The paper examines the electricity demand behavior for Saudi Arabia, using annual data for the period of 19902016, at regional level. The study finds that income, price and population are the main drivers of elec- tricity demand at regional level. Although, the impacts vary across regions (central, eastern, southern and western), the estimated elasticities all are statistically significant, in both long and short run, and have the expected signs for all the regions. The income, price and population elasticities range from 0.10 to 0.93, from -0.63 to -0.06, and from 0.24 to 0.95, respectively, across regions in the long run. In the short run these intervals are (0.05, 0.47), (0.27, 0.01) and (0.13, 1.49) respectively for income, price and population across the regions. The findings reported in this paper, should assist policy makers to develop insights about the potential regional impact of changes to electricity prices, income and population patterns.
1. Introduction
Since energy is a pervasive input to all business and recreational activities, total energy demand is an important indicator that helps explain the pattern of economic development within a country. Identifying and understanding the key determinants of electricity de- mand is therefore important for the economic prosperity of a country, since the availability of reliable electricity directly affects the prospects of sustainable economic development. With important mega projects already in the works and national transformation programs such as the National Industrial Development and Logistics Program (NIDLP, 2019) already being implemented, understanding the existing and projected behaviour of electricity demand is more important now than ever be- fore.
While it is relevant to conduct a study that investigates the de- terminants of aggregate electricity demand in KSA, this is a topic that has already been addressed by the existing literature to some extent (Atalla and Hunt, 2016, inter alia). However, aggregate level electricity demand has not been studied at regional level. Hence, there is a need for a research to investigate the aggregate level electricity demand accross regions.
The objective of this research is to understand how determinants of
the electricity consumption shape it over time in the Central, Eastern, Southern and Western regions of Saudi Arabia and suggest policy in- sights accordingly.
Note that this 4-region classification is adopted by the Saudi Electricity Company (SEC) and sum of these four regions consumption add up to the total electricity consumption of the Kingdom.
The following points motivated us to conduct electricity consump- tion analysis at the regional level. First, the regional dimension is im- portant because of the differences in weather patterns (and subse- quently the electricity demand profiles) across the country. Second, the distribution of residential, commercial, and industrial activities is dif- ferent across the regions and this may imply different relationships between electricity consumption and its drivers. For example, in the eastern region the electricity consumption is mainly industry-driven whereas in western region, where we have the holy cities of Makkah and Madinah, this is mostly population/residential driven (SAMA, 2019). Third, the implementation of the mega projects mentioned above will also have implications for electricity demand at the regional level. Finally, recent analysis show that different regions react differ- ently to the energy, of which electricity price reform, one of the key initiatives in the Fiscal Balance Program of the Saudi Vision 2030 (Alyamani et al., 2019).
https://doi.org/10.1016/j.tej.2020.106772
Corresponding author. E-mail address: [email protected] (J.I. Mikayilov).
The Electricity Journal 33 (2020) 106772
Available online 20 April 2020 1040-6190/ 2020 The Author(s). Published by Elsevier Inc. This is an open access article under the CC BY license (http://creativecommons.org/licenses/BY/4.0/).
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A regional approach for KSA constitutes a novel and significant contribution to the literature on electricity demand in the following ways. First, to the best of our knowledge, there are very few to none studies that examine the determinants of electricity demand at the re- gional level for KSA. Alyamani et al. (2019) considered regional aspects of the electricity consumption. However, they only considered re- sidential electricity consumption and did just a descriptive analysis. Diabi (1998) examined total electricity consumption for the five regions of Saudi Arabia over the period 19801992. However, he did a panel analysis and did not estimate region-specific parameters/elasticities, and hence is different from time series that we conduct in this research. Additionally, he did not address integration-cointegration and other properties of the data used such as cross-sectional dependency, which can lead a serious issue such as bias and inconsistencies and thus mis- leading policy recommendations. Second, it investigates the demand for electricity at a disaggregated regional level, which takes into account the region specific features of electricity demand behavior; Third, it takes into account the impact of demographic factors which may play a significant role in electricity demand formation; Fourth, it uses the more recent data, which partially enables us to see the impact of the ongoing energy price reforms and consequences of the low oil price environment on electricity demand.
From a policy perspective, given the current transition from a heavily subsidized electricity price environment to a market-based price environment where subsidies are gradually phased out, it is im- portant to consider the impact of this transition from a regional per- spective. The findings reported in this study would help a better un- derstanding of the regional impact (on electricity demand) of different price policy scenarios and changes in population and income. The findings will also be useful in determining which regions, and how much, to provide transitional support to in order to alleviate some of the financial hardships associated with rising electricity prices.1
This paper employs cointegration and equilibrium error correction (ECM) methodology to develop long- and short-run price, income and demographic elasticities for regional electricity demand.
The study concludes that income, price and population are the main drivers of electricity demand at regional level as theoretically expected. Although, the impacts vary across regions, the estimated elasticities all are statistically significant, in both long and short run, and have the expected signs for all the regions. The income, price and population elasticities range from 0.10 to 0.93, from -0.63 to -0.06, and from 0.24 to 0.95, respectively, across regions in the long run. In the short run these intervals are (0.05, 0.47), (-0.27, -0.01) and (0.13, 1.49) respec- tively for income, price and population across the regions. The obtained Speed of Adjustment (SoA) coefficients are significant in all cases in- dicating the short-run deviations from the long-run relationship con- verge back to the equilibrium path.
The rest of the paper is structured as follows; Section 2 reviews the literature on electricity demand modeling in the case of Saudi Arabia, Section 3 contains the theoretical framework and Section 4 briefly de- scribes the methodology used, Section 5 presents the data. Estimation results are presented in Section 6. In Section 7, we discuss our key findings, while Section 8 concludes the study and provides the policy implications where we link our findings to the current policy environ- ment.
2. review
In this section, we highlight some of the key trends in the literature on residential, industrial and total electricity consumption in Saudi
Arabia given that there are only two studies, to the best of our knowledge, analyzing the regional electricity consumption in Saudi Arabia. A recent study by Alyamani et al. (2019) discussed regional aspects of electricity consumption in residential sector. However, Alyamani et al. (2019) is descriptive-type study and does not estimate elasticities. Diabi (1998) studied total electricity consumption for the five regions of Saudi Arabia, employing the data spanning from 1980 to 1992. He estimated the kingdom-wise elasticities not regional-specific ones. The study is relatively old which might not reflect the electricity demand behaviour for the current period, due to the substantial changes in terms of economic development. In addition, Diabi (1998) uses panel estimation techniques, without performing integration-co- integration analyses, did not address the potential cross-sectional de- pendency within regions. The mentioned limitations might result in biased estimation results and consequently misleading conclusions.

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