Modeling and Forecasting Electricity Demand in Azerbaijan Using Cointegration Techniques

Abstract

Policymakers in developing and transitional economies require sound models to: (i) understand the drivers of rapidly growing energy consumption and (ii) produce forecasts of future energy demand. This paper attempts to model electricity demand in Azerbaijan and provide future forecast scenarios-as far as we are aware this is the first such attempt for Azerbaijan using a comprehensive modelling framework. Electricity consumption increased and decreased considerably in Azerbaijan from 1995 to 2013 (the period used for the empirical analysis)-it increased on average by about 4% per annum from 1995 to 2006 but decreased by about 4 1 2 % per annum from 2006 to 2010 and increased thereafter. It is therefore vital that Azerbaijani planners and policymakers understand what drives electricity demand and be able to forecast how it will grow in order to plan for future power production. However, modeling electricity demand for such a country has many challenges. Azerbaijan is rich in energy resources, consequently GDP is heavily influenced by oil prices; hence, real non-oil GDP is employed as the activity driver in this research (unlike almost all previous aggregate energy demand studies). Moreover, electricity prices are administered rather than market driven. Therefore, different cointegration and error correction techniques are employed to estimate a number of per capita electricity demand models for Azerbaijan, which are used to produce forecast scenarios for up to 2025. The resulting estimated models (in terms of coefficients, etc.) and forecasts of electricity demand for Azerbaijan in 2025 prove to be very similar; with the Business as Usual forecast ranging from about of 19 1 2 to 21 TWh.

Modeling of Electricity Demand for Azerbaijan: Time-Varying Coefficient Cointegration Approach

“…It is worth noting that our conclusion is the same as that of [23] who used the same price and energy variables. Based on this conclusion, we can proceed to the next section, i.e., to investigate the long-run relationship among the variables of interest.…”

“…It is noteworthy that as [23] states, there are very limited studies investigating electricity demand in Azerbaijan. We review them below.…”

“…Hasanov et al [23] modeled and forecasted total final electricity consumption in Azerbaijan over the period 1995-2013, employing the demand-side modeling as a theoretical framework. They used different cointegration and error correction methods, namely Johansen, Auto-Regressive Distributed Lags Bounds Testing (ARDLBT), Engle-Granger (EG) with Fully Modified Ordinary Least Squares (FMOLS), Dynamic Ordinary Least Squares (DOLS) and Canonical Cointegration Regression (CCR).…”

Does Urbanization Boost Pollution from Transport?

“…The real Gross Domestic Product (GDP), the population of Azerbaijan, and total energy consumption in Azerbaijan has been taken from the base of "World Development Indicators" presented by World Bank on 12 th of November, in 2015(WB, 2015. Note that Hasanov, Hunt and Mikayilov (2016) discuss that since the Azerbaijani economy is highly dependent on oil sector and this sector is exogenous to the rest economy, non-oil GDP can be used as a measure of economic activity. However, we do not consider non-oil GDP here as it starts only in 1995 and thereby makes number of observations smaller.…”

Why Electricity Demand Is Highly Income-Elastic in Spain: A Cross-Country Comparison Based on an Index-Decomposition Analysis

“…Their results show that long run income elasticities of electricity consumption are larger than unity. More recently, Hasanov [15], summarized long run income elasticities of electricity consumption in resource-rich small open developing economies that ranges from 0. With respect to sectorial differences in income elasticity of electricity consumption, Bianco et al [16] found that for Italy the GDP elasticity of non-residential electricity consumption is fairly high in the short run (1.41) and even larger in the long run (2.20).…”