An empirical time series analysis of energy consumption in Cyprus

Abstract

This report presents the first econometric analysis of energy consumption in Cyprus. Time series analysed were those of residential, commercial, industrial and agricultural electricity use, gasoline consumption as well as the aggregate non-electricity and total energy consumption using annual data from 1960 to 2004. The dynamic interaction between the corresponding energy form and appropriate income, price and weather variables was examined through the application of widely used time series analysis techniques such as unit root and cointegration tests, Vector Error Correction (VEC) models, Granger causality tests and impulse response functions. Because of power and size problems associated with these methods in small samples, single-equation autoregressive distributed lag (ARDL) models were also employed for each energy variable. The validity of inferences made with such models has been reestablished in the late 1990s thanks to the work of Pesaran-Shin-Smith. Results from cointegration tests and VEC models show that a long-run equilibrium relationship between energy, income and prices exists for most energy uses. The long-term impact of income and prices on energy use is significant, with elasticities similar to those reported for other countries (above unity for income, less than 0.5 for prices in absolute terms). Weather fluctuations seem to be the most significant cause of short-term variation in electricity use (albeit with small elasticity values). Granger causality tests indicate that energy prices can be treated as purely exogenous, income and prices often Granger-cause energy use, and there is bidirectional causality between most energy forms and income or economic activity. ARDL test results have to be interpreted in conjunction with those of the cointegration tests. In the cases of residential and commercial electricity consumption, elasticities are found to be similar with those of the VEC model, whereas results of the two methods are different for the long-term elasticities of gasoline and industrial electricity consumption. Despite the quite small sample size, which poses limitations on the analysis, the evidence from both the VEC and ARDL models shows that results are meaningful and robust for residential, commercial and industrial electricity as well as gasoline consumption. This finding is important as it allows the corresponding income, price and weather elasticities to be used for forecasting purposes and policy analyses.