ABSTRACT

This study empirically examined the relationship between energy
consumption and economic growth in Nigeria. Time series data was generated
covering the period 1970 through 2012. The study used electricity consumption
and real gross domestic product to test for this relationship. By applying unit
roots, the co-integration techniques, and static regression analysis, the
results derived infer that there exists a positive relationship between current
period electricity consumption and economic growth and so, the null hypothesis
predicted is not supported by this study. The implication of the study is that
increased electricity consumption is a strong determinant of economic growth
having an implicit effect in lagged periods and both an implicit and explicit
effect on the present period in Nigeria. Thus, it is pertinent that this sector
should be given more relevance by fully implementing the process of electricity
liberalization and privatization, exploiting the opportunities laden in the
sector to increase economic growth. It further recommends that emphasis on
non-market policies like public enlightenment, enforcing energy efficiency
standards will encourage electricity conservation and efficiency especially in
the residential sector which is the largest consumer of electricity in Nigeria.
Lastly, providing steady electricity supply is paramount for the country’s
drive towards industrialization.

TABLE OF CONTENTS

ABSTRACT…………………………………………………………………………iii

LIST OF
TABLES…………………………………………………………………….x

LIST OF
FIGURES……………………………………………………………….…xi

LIST OF
ABBREVIATIONS………………………………………………………..xii

1  INTRODUCTION………………………………………………………….………1

1.1  Background
of Study…………………………………………………………..1

1.2  Statement
of the Problem……………………………………………………….4

1.3  Research
Questions…………………………………………………………….6

1.4  Objectives
of the Study…………………………………………………………6

1.5  Structure
of the Study………………………………………………………….7

2  LITERATURE
REVIEW…………………………………………………………..8

2.1  Conceptual
Framework…………………………………………………………8

2.1.1  Energy
Supply……………………………………………………………..8

2.1.2  Energy
Demand……………………………………………………………9

2.1.3  Renewable
and Non-Renewable Energy Resources……………………..10

2.1.4  Energy
Conversion, Efficiency and Green Energy………………………10

2.1.5  Sustainable
Energy Supply………………………………………………11

2.1.6  The
Goals of Energy Policy………………………………………………11

2.1.7  Economic
Growth and Development…………………………………….12

2.1.8  Energy and
Economic Development…………………………………….12

2.2  Empirical
Review……………………………………………………………..13

3  ENERGY
AND THE NIGERIAN ECONOMY………………………………….18

3.1  Introduction……………………………………………………………………18

3.2  Electricity
reform in Nigeria………………………………………………….19

3.2.1  Pre-reform
Era……………………………………………………………19

3.2.2  Post-Reform
Era…………………………………………………………20

3.3  Major
Energy Resources in Nigeria…………………………………………..22

3.3.1  Renewable
Energy Resources……………………………………………23

3.3.2  Non-Renewable
Energy Resources………………………………………24

3.4  Demand
and Supply of Energy in Nigeria……………………………………26

3.4.1  The
Demand for energy in Nigeria………………………………………26

3.4.2  The
Supply of Energy in Nigeria…………………………………………27

3.5  Energy
Utilization in Nigeria…………………………………………………29

3.5.1  Industrial
Utilization of Energy in Nigeria………………………………31

3.5.2  Commercial
Utilization of energy in Nigeria……………………………31

3.5.3  Residential
Utilization of Energy in Nigeria…………………………….32

3.6  Issues
in Optimal Energy Pricing in Nigeria…………………………………33

3.6.1  Petroleum
Product Pricing and the issue of Subsidy…………………….33

3.6.2  The
Optimal Pricing of Electricity……………………………………….34

3.7  Effects
of Underutilized Capacity and Inadequate Energy Supply in Nigeria . 34

3.7.1  Impacts
of Energy Supply on Nigeria’s Economy………………………35

3.7.2  Energy
Supply and Sectoral Outputs in Nigeria…………………………35

3.7.3  Energy
Supply and Poverty in Nigeria…………………………………..36

4  METHODOLOGY
AND FINDINGS…………………………………………….38

4.1  Model
Specification…………………………………………………………..38

4.2  Test
for Unit Root…………………………………………………………….39

4.3  Cointegration
Test…………………………………………………………….40

4.4  The
Error Correction Model………………………………………………….40

4.5  Granger
Causality Test……………………………………………………….41

4.6  Empirical
Results and Findings………………………………………………42

4.6.1  Empirical
Results…………………………………………………………44

5  CONCLUSION
AND RECOMMENDATION……………………………………54

5.1  Conclusion……………………………………………………………………54

5.2  Recommendation……………………………………………………………..56

REFERENCES………………………………………………………………………58

LIST OF TABLES

Table 1.
Energy Resources in Nigeria…………………………………………..26

Table 2.
Total Projected Demand in Megawatts………………………………..27

Table 3.
Power Supply in Megawatts……………………………………………28

Table 4.
ADF and PP unit root test……………………………………………..46

Table 5.
Co-integration results for overall model………………………………. 47

Table 6.
Error correction Model………………………………………………….49

Table7.Granger
causality testgrowth……………………………….……………51

Table 8.
Variance Decomposition……………………………………………….53

LIST OF FIGURES

Figure 1. The Relationship of
the Variables…………………………………………43

Figure 2. Impulse
Response…………………………………………………………53

LIST OF ABBREVIATIONS

CHAPTER ONE

INTRODUCTION

1.1     Background to the
Study

The growth, prosperity and national security of any country are
critically dependent upon the adequacy of its electricity supply industry.
Indeed, the link between electricity supply and economic growth is such that
electric energy generation is not only a major and increasing source of energy;
it is also for us a growth industry as well as ‘entirely new industry ’
(Okongwu,1986). Energy is a required input for production and consumption
activities, making it indispensable source of economic growth. Nigeria is no
exception. It is instructive to note that, electric power is vital for economic
growth and quality of life not only because it fosters the productivity of
capital, labour and other factors of production, but also that increased
consumption of energy, particularly commercial energy like electricity
signifies high economic status of a country (Adebola, 2011), These facts
have attracted researchers to investigate the role of electricity in different
countries.

However, Classical economists did not recognize electric energy
as a factor of production and neither did the
Neoclassical.  Today, economists like Alam (2006) as cited in
Adebola (2011) finds out in his work on ‘Economic Growth with Energy’ that
not only does energy serve as a factor of production; it also acts as a
booster to growth of a nation. Thus, there is a departure from
classical and neoclassical economics’ factors of production which include
only capital, labour and technology to now include energy as a factor
of production. It may be noted that electricity has effects not
only on factors of production but also on the impact it hason capital
accumulation. In literature, the relationships between electricity
consumption and economic growth are well documented. However, debate
regarding the causal relationship between electricity consumption and economic
growth has attracted increasing attention in recent years. Emeka (2010) posits
that the thrust of this debate has been whether electricity consumption causes
economic growth or whether it is the economic growth that leads to electricity
consumption. These causality issues, therefore, suggest the need to carry out
further investigations.

Indeed, most studies linking electricity consumption to economic
growth were conducted utilizing causality test for multi-country but fewer
studies that establish the relationship between the two
variables exist in literatures that employed cointegration technique
for separate country as Nigeria. This study, therefore, will fill the gap.

Undeniably, Nigeria is presently faced with the challenge of
providing sustainable, adequate, reliable and efficient electricity supply to
residential, commercial and industrial consumers. This situation has adversely
affected the social and economic life of the citizenry (Jonathan,
2010). The trend however, has often been constrained by perennial dismal
energy supply plaguing this fledgling economy.  Like most economies
in the West African sub-region, the country’s energy production rate continues
to lag behind the rate of growth in demand from its industrial and services
sectors (Adoghe, 2010; Igbinovia and Odiase, 2009; Iwayemi, 2008; Okongwu, 1986
to mention few). Although electric energy generation and supply difficulties in
the country over the years are well documented, worsening supply conditions
continue to heighten growing concerns in recent years about the ultimate impact
of the condition on the nation’s long-term economic growth prospects and
quality of life (Iwayemi,2008).

The foregoing provides the basis for examining the relationship
between electricity consumption and economic growth in Nigeria.

1.2     Statement of the
Problem

Electricity plays a very important role in the socio-economic and
technological development of every nation. The electricity demand in Nigeria far
outstrips the supply and the supply is epileptic in nature. The country is
faced with acute electricity problems, which is hindering its development
notwithstanding the availability of vast natural resources in the country. It
is widely accepted that there is a strong correla­tion between socio-economic
development and the availability of electricity. Given the situation above, the
study seeks to examine the relationship between electricity consumption and
economic growth in Nigeria.

1.3 Research Questions

This will give the empirical analysis of the study to arrive
at a logical conclusion. Econometrics methods will be use in analysing the
empirical data to demonstrate the causal relationship between energy
consumption and economic growth in Nigeria. In view of this, gross domestic
product will be regress against the energy consumption and fuel price in
Nigeria to find;

1.if there is any causal
relationship between energy consumption on economic growth in Nigeria,

2.if there is any long-run
co-integration between domestic output and power sector development in Nigeria.

1.4Objectives of the Study

The main objective of this research is to establish, both
theoretically and empirically, the impact of energy consumption on sustainable
economic growth.

The other objectives of the
study are to:

·        
Examine the concept of energy demand,

·        
Ascertain relationship between energy
consumption and economic growth,

·        
Analyze the impact of widened energy
demand-supply gap on the welfare of the users,

·        
Make policy recommendations on sustainable
energy supply in Nigeria,

Suggestions will be noted base
on the results obtained from the analysis, for efficient management and control
of Nigeria’s electricity supply.

1.5  Significance of the Study

The study is relevant in the true sense that it will help to improve
the erratic supply of electricity to households, firms and government in the
country. This study identifiesthe central role of electricity in the process of
economic transformation. Electrical energy supply is not only a major and
increasing source of energy; it is also for us a growth industry as well as
‘entirely new industry’ Therefore, this study will facilitate the effort of
policy makers and government to make PHCN perform efficiently. The importance
of vibrant powers sector is necessary because of the clamour in the need to
attain sustainable development. Also this empirical study will be important for
policy recommendation from the point of view of electricity consumption and
economic growth for Nigeria and also for global panel. The study will help
provide reliable service; improve efficiency and stimulate growth for small
business that rely on electricity which can have huge impact on the lives of
rural and urban dwellers by creating jobs.

Households,   firms and government will have to
benefit from the study through improved quality, efficiency and reliability in
electric supply. It will add literature to the existing field of energy
economics.

1.6     Brief Methodology

The main focus of this study is to empirically examine the
relationship between electricity consumption and economic growth in Nigeria. It
adopts the descriptive and inferential methods to analyse the data. To
complement the descriptive and analytical approaches mentioned above, the
Ordinary Least Square was used. In this case one model was formulated and
adequate econometric techniques adopted. The data set for this study is mainly
secondary data. The secondary data comprises annual time series covering the
periods1970-2012. All the data were sourced from the World Population
Indicator (2012) and Central Bank of Nigeria Annual Statistical Bulletin
(2009). In this study, the real GDP is expressed in terms of million Naira (the
Nigerian currency) while electricity consumption is expressed in terms of
Kilowatts per hour.

1.7 Structure of the Study

The thesis is structured into five chapters. Chapter one
involve the background of the research, statement of problem, research
questions, objectives of study.

Chapter two
analyses the review of relevant empirical literature, the

conceptualization and theoretical review.

Chapter three will give the overview of energy position in
Nigeria, the projected energy demand and supply, sources and factors
influencing growth of energy supply in Nigeria.

 Chapter four explains
the methodologies that will be used in the course of the study, and the result
of the analysis. It will provide econometric analyses of energy consumption in
Nigeria. Using numerical values of the parameter estimates and testing the
hypotheses.

Chapter 5 is the conclusion and
recommendation which will help further researchers, policy makers, institutions
and companies that are interested in the growth of energy supply in
Nigeria.