Electricity demand in the Maltese islands : an empirical analysis

Abstract

The primary focus of this dissertation is to present an empirical analysis of electricity consumption in relation to appropriate economic activity (income variables), electricity prices and fluctuations in average temperature. Using quarterly data for Malta from 1995 to 2008, this paper examined electricity use in the residential and industrial sectors. The analysis was performed using the step by step approach of first testing for stationarity and then for any long-run and short run relationships using cointegration tests and Vector Error Correction models, respectively In the light of the recent revisions to the water and electricity tariffs, the results obtained will shed light on the effects on electricity consumption, which will depend on the price elasticity of demand for electricity. Consequently, the results should also determine the income elasticity and whether there is Granger causality among the variables. Furthermore, through simulations and impulse response functions this paper will seek to evaluate the impact on the variables in the occurrence of innovations and shocks. The empirical evidence suggests that electricity consumption is rather inelastic, and is mostly affected by weather fluctuations. The policy implications of such relationships arc presented.