Examining the determinants of electricity demand by South African households per income level

Abstract

For the period 1975–2016, this paper examines the determinants of the residential demand for electricity in South Africa including disposable income, electricity prices, food prices as well as the impact of the 2007/08 load-shedding wave and the 2008 electricity price restructuring. Given the high income inequality levels in South Africa, this relationship was investigated at aggregated and disaggregated income levels. Based on an Autoregressive Distributed Lag (ARDL) model, the empirical results indicate long-run cointegration between residential electricity consumption, gross national disposable income, electricity prices and food prices. Disposable income elasticities have a positive sign for the aggregate and all income groups, indicating that as income increases, South African households consume more electricity (normal good). As expected, price elasticities are negative and significant – for both the aggregated and disaggregated models – indicating that electricity prices do influence electricity demand for all South African households. The paper also examines the complementarity or substitutability of food and electricity. At both the aggregated and disaggregated income levels, the results showed that food and electricity are substitute goods for all South African households. However, as expected, the magnitude of this relationship is marginally different for each income group.