electricity

Electricity

Electricity is a form of energy resulting from the existence of charged particles (such as electrons or protons), either statically as an accumulation of charge or dynamically as a current. It is a secondary energy source, meaning it is converted from another, primary source of energy, such as coal, natural gas, oil, nuclear, or renewable sources like sunlight, wind, or hydropower. In simpler terms, electricity is the flow of electric charge. It can manifest in various forms, including static electricity, where charges accumulate on surfaces and discharge when given a pathway, and dynamic electricity, where charges move through a conductor, creating an electric current. The unit of measurement for electric charge is the coulomb, and the rate of flow of electric charge is measured in amperes. The voltage, measured in volts, is a measure of the electric potential energy per unit charge, determining the force that drives electric current. Electricity plays a crucial role in various aspects of modern life, powering devices, appliances, lighting, and serving as a fundamental component in the functioning of electrical circuits.

Electricity evolution

The history of electricity is a complex and multifaceted story that spans centuries of discovery and innovation. Here is a brief overview of key milestones in the development of our understanding and application of electricity:

Ancient Observations (Pre-17th Century): Ancient civilizations, such as the Greeks and Egyptians, were aware of naturally occurring phenomena like lightning and static electricity.

Thales of Miletus, a Greek philosopher, observed that rubbing certain materials (like amber) against fur would make them attract lightweight objects.

Early Experiments (17th – 18th Centuries):

Otto von Guericke, a German scientist, experimented with generating static electricity using a sulfur globe and a hand-cranked machine in the 17th century.

In the 18th century, scientists like Benjamin Franklin conducted experiments on electricity. Franklin’s famous kite experiment in 1752 demonstrated the connection between lightning and electricity.

Development of the Leyden Jar (1745):

Ewald Georg von Kleist and Pieter van Musschenbroek independently developed the Leyden Jar, an early form of capacitor, capable of storing electrical charge.

Discovery of Conductivity (Late 18th Century):

Luigi Galvani’s experiments with frogs’ legs in the late 18th century led to the discovery of bioelectricity, demonstrating that electricity could cause muscle contractions.

Voltaic Pile (1800):

Alessandro Volta invented the voltaic pile, a forerunner to the modern battery. This marked a significant advancement in the practical generation of continuous electric current.

Development of Electric Generators (Early 19th Century):

Michael Faraday’s work in the early 19th century laid the foundation for understanding electromagnetic induction, leading to the development of electric generators.

Introduction of Electric Light (19th Century):

Thomas Edison is credited with the practical development and commercialization of the incandescent light bulb in the late 19th century, revolutionizing illumination.

Advancements in Power Transmission (Late 19th – Early 20th Centuries):

Nikola Tesla’s contributions, including the development of alternating current (AC) systems, played a crucial role in the efficient transmission of electrical power over long distances.

Expansion of Electrical Technologies (20th Century):

The 20th century saw rapid advancements in electrical technologies, including the widespread adoption of electric power for homes, industries, and transportation.

Digital Revolution (Late 20th Century):

The latter half of the 20th century witnessed the digital revolution, with the development of electronic devices, computers, and the global expansion of the internet, all dependent on electricity.

The history of electricity is a continuous narrative of scientific inquiry, technological innovation, and the integration of electricity into various aspects of human life. It has transformed society, industry, and communication, shaping the modern world in profound ways.

Electricity supply in east Africa

Electricity consumption in Uganda

Energy use in Uganda

Energy is one of the main inputs to the production process and therefore, its development is crucial for developing economies aiming to boost their economic growth and private investment. This sector’s activities relate to and strengthen the rest of the economy as energy forms an input for almost all production processes of goods and services. Electricity is one of the important components of the energy sector as it is the most versatile and easily controlled form of energy (IMF, 2017). It contributes to economic growth directly through value addition associated with extraction and transformation of inputs, technology transfers, marketing and distribution of goods or services and indirectly through employment generation.

In many industries, technology transfers tend to increase the relative share of electricity in the value of output and in these industries, productivity growth is found to be greater the lower the real price of electricity and vice versa. In the case of households, access to electricity allows them to meet their most basic subsistence needs which translate into better standards of living (World Bank, 2017). Supply interruptions of many sources of energy are known to have a great impact as they can harshly impact the economies of almost all countries. In addition, stable and lower energy prices are known to help stimulate the growth rate of any economy. This is because lower energy prices result in increasing disposable income for consumers and lowering costs for firms. The resulting improved profit margins for firms and higher disposable income for consumers provide incentives for accelerated rates of growth.

Easterly, 1999 also argues that in order to validate the information from official statistics on output growth, it is helpful to consider developments in the correlations of production, consumption, and economic development or growth, such as consumption of electricity, the mortality rate, credit, and fiscal revenues. In relation to electricity, it is important to understand the correlations and causal relationships between economic growth and electricity, regarding both consumption and productivity to formulate well directed policies, regulate the industry and manage individual firms.

Statement of the problem                 

As the country moves towards having an industrialized economy with high sustained growth rates, the government of Uganda has identified electricity generation and distribution as one of the key strategic interventions (NDP II; Vision 2040). As a result, it has invested heavily in the energy sector, particularly the electricity sub-sector, with the aim of increasing accessibility and supply. This move signals the importance of electricity in the country’s industrialization process which is in line with the Ecological growth theory that considers energy to be very critical in growth of the economy through the production process (Stern and Cleveland, 2004; Kummel et al, 2010; Hall et al, 2001; and Stern, 2010). This is contrary to the neoclassical school of thought by Solow (1956) which looks at energy as an intermediate input that can easily be substituted with labor or capital.

The increased investment in the sub-sector currently has Uganda enjoying a short term surplus situation amidst low electricity demand. This has mostly been attributed to the high end-user power tariffs that have increased input prices and prices of other commodities, which in turn contribute to higher overall inflation and also dampen aggregate demand and growth. On the other hand, one may argue that the negative shocks in the economy like sharp changes in prices of goods and services and overall decline in GDP growth rate have increased incidence of income poverty hence reduction in consumption “of electricity”, (UNHS, 2017).

Therefore, for the country to maximize the benefits accrued to electricity use such as, employment generation and increased productivity and delivery of services, it is essential to investigate the relationship between electricity consumption and various economic factors and also examine the causal relationship between these two variables as this has important implications for energy and economic growth policies.

Objective of the Study

1. To determine the dependence of electricity consumption on economic factors and technical factors in Uganda.
2. To estimate the causal relationship between electricity consumption and economic growth in Uganda.

Significance of the study                                                  

Extensive empirical studies have examined the role of energy in the growth process, however, most of these are for the developed world (Ozturk & Acaravci, 2011; Payne, 2010; (Odhiambo, 2009a, 2010). Most of the empirical studies have used Granger causality to test whether energy use causes economic growth or whether energy use is determined by the level of output in the context of a bivariate vector auto-regression. The results have been generally inconclusive probably due to the omission of necessary variables, either the quantities of other inputs (and quality adjustment of the energy input) or energy prices especially due to availability of data (Stern, 2010).

With this in mind, this study seeks to investigate the multi-variate causality between electricity consumption and economic growth using the most recent dataset and incorporating the necessary variables that affect both may change not only the direction of causality between the two variables but also the magnitude of the estimates as indicated by (Odhiambo, 2010; Stern, 2017).

Also the need to learn more about the correlations and causal relationships between economic growth and electricity consumption is important as this will result into well-directed policy and program decisions and incentives regarding the energy sector.

Scope of the Study

The study investigates the relationship using annual data for the period starting 1982 to 2016. It will focus on Uganda due to availability and reliability of data. The data for the variables to be estimated will be obtained from World Development Indicators (WDI), Uganda Bureau of Statistics (UBOS), and Electricity Regulatory Authority (ERA) databases.

Outline of the study

The study is organized in five chapters. Chapter one presents the introduction to the study. Chapter two reviews theoretical literature, highlighting the theoretical framework used for the study and empirical literature that explains the relationship between electricity consumption and economic growth. Chapter three describes the methodology of the study, specification of the empirical model, definition and measurement of the variables included in the empirical analysis, estimation techniques and the sources of the data used in the analysis. Chapter four presents and discusses findings from analysis and finally Chapter five summarizes major findings, conclusions from the research report, discusses limitations and suggests areas for further research.

Current Electricity Sector and generation in uganda

The Government of Uganda has for the past decade embarked on a Power sub-sector Reform Programme, which has resulted in the implementation of significant structural changes within the sector. The Reform Programme was aimed at transforming the electricity sector into a financially viable industry that would enable increased supply of adequate, reliable, and least-cost power to meet the country’s demand (Karekezi et al. 2004).

Following the decision to reform the sector, several laws were passed such as the Electricity Act, 1999 that liberalized the electricity industry, established the Electricity Regulatory Authority to regulate the sector, the Rural Electrification Fund and Electricity Dispute Tribunal and also unbundled the Uganda Electricity Board (UEB) leading to three public private partnerships namely Uganda Electricity Generation Company Limited (UEGCL), Uganda Electricity Transmission Company Limited (UETCL) and Uganda Electricity Distribution Company Limited (In 2005, UMEME Limited took over the business to distribute and supply electricity for the next 20 years).

As at end of 2014, 13 power plants were selling power to the national grid with a total licensed generation capacity of 828.5MW and 873.9MW in 2017 (ERA, 2014). Uganda’s Electricity Supply Industry is largely dependent on hydro power plants whose contribution to the generation mix stood at 80% during financial year 2015/16. In the past years this led to occasional load shedding since supply did not increase proportionally. Currently, Uganda has a short term surplus situation amidst low electricity demand. Electricity demand has been growing at an average of 10% per annum mainly resulting from the prominent GDP growth rates of about 6% and increasing population growth rates during the past two decades (MEMD).

The desire to achieve sustained high growth rates coupled with conditions from international donors has pushed major public investments into the energy sector. Even though solid biomass fuels are the most consumed in the region, main focus is on electricity, petroleum and renewable energy sub sectors as these dominate the major economic sectors; agricultural, industrial and service sectors (East African Community, 2016; Othieno & Awange, 2016). An estimated 90 percent of public expenditure on energy infrastructure is invested in extension of the electricity grid. Such projects include large hydro power projects are under construction like Karuma (600MW), Isimba (183MW) and Ayago, smaller hydro power projects as well as transmission lines under the Rural Electrification Programme. This will definitely improve efficiency and effectiveness of traditional sectors (i.e. Agriculture related businesses, especially those centered on value addition) and also aid in the continuous expansion of the industrial and service sectors in the country.

Despite these efforts, the electricity sector remains relatively undeveloped with only 4.4 % of rural households had access to electricity on the grid in 2014 (Mawejje, 2014). As a result, Uganda’s per capita electricity consumption, estimated at 215 kWh per capita per year is one of the lowest in the whole world (Sub-Saharan Africa’s average: 552 kWh per capita, World average: 2,975 per capita). In addition, reliability of electricity supply continues to be a major constraint to private sector competitiveness and growth: one in every four business in Uganda report electricity reliability as the most challenging constraint (World Bank, 2013). The low power accessibility (26.7% according to WDI) has led to forest depletion by 39% since the early 1990s because most people depend on wood fuels and charcoal which is also made out of wood.

Table 1: Electrification Rates (%) in the EAC for the year 2013

Source: WEO Electricity Access database

Uganda’s electricity demand profile reflects strong industrial demand for electricity which accounts for 62% of electricity consumption in 2015 and 64% in 2016. The share of electricity demand by the different categories of consumers, including industrial, commercial, and domestic consumers, and export is shown figure 1 below.

Figure 1: Distribution of electricity demand in 2015

Source: Electricity Regulatory Authority

Electricity Tariffs and Electricity Consumption

Uganda has one of the highest electricity tariffs in East Africa, with pricing in four categories: domestic, street lighting, commercial and medium, large and extra-large industries (ERA, 2018). Energy prices are adjusted every 3 months by ERA taking into account changes in the Consumer Price Index, foreign exchange rates and international fuel prices. Electricity end-user tariffs are reflective of generation, transmission and distribution costs, and the difference being footed from Government budget by way of subsidies. The high power tariffs have discouraged consumption with many small industries failing to take off as a result of the high cost of production while those that have managed to stay in production pass on this cost to final consumers through high prices for their goods and services. However, according to ERA, 2018, failure to utilize generation capacity will lead to increased tariffs as power losses were taken as a major contributing factor for the high power tariffs paid by the consumer. The figure below shows ERA distribution of electricity tariffs from 1991 to 2018-Q2.

Figure 2: ERA distribution of electricity tariffs from 1991 to 2018-Q2

2.2 Economic growth in Uganda

The macro-economic environment in Uganda has undergone significant reforms since the mid-1980s aimed at improving economic performance through price stabilization, attracting investments, increasing employment opportunities and incomes, and improving the productivity and efficiency of public investments. The Ugandan economy showed remarkable resilience in achieving modest Gross Domestic Product (GDP) growth of 4.8% in 2016 compared to 5.5% growth in 2015 (AfricanDevelopmentBank, 2017; WorldEconomicForum, 2017)..

In F/Y 2015/16, GDP at 2009/10 constant prices was estimated to have grown by 4.8 % (UBOS, 2016). Sector performance was recorded as follows; Agriculture, Forestry, and Fisheries (3.2 %), Industry (4.0 %), Services (6.5 %), and Taxes on products (0.9%). In F/Y 2015/16, the nominal GDP stood at 84.4 trillion shillings compared to 77.8 trillion in 2014/15. In constant prices, the GDP stood at 55.8 trillion in F/Y 2015/16 and GDP per Capita income at current prices grew from 2,226,031 shillings in 2014/15 to 2,347,754 shillings in 2015/16.

In regard Consumer Prices Indices, annual average Headline inflation in 2015 was 5.5 % compared to 3.1 % annual average inflation recorded in 2014. Specifically, the annual average Core inflation increased to 5.6 % in 2015 compared to 2.7 % recorded in 2014. Annual average Food Crops inflation for 2015 declined to 6.8 percent compared to 7.6 percent recorded in 2014 while Annual average Energy, Fuel and Utilities (EFU) inflation increased to 3.2 percent compared to 1.9 percent recorded for the year 2014.

Figure 3: Monthly Inflation for Housing, Water, Electricity, Gas and other Fuels

Source: Uganda Bureau of Statistics

2.3 Electricity Consumption and Economic Growth

Uganda’s economy is electricity dependent for its growing industrial sector especially manufacturing, agro-processing and telecommunications and the commercial sector. The energy sector is one of the key sectors in the economy as it provides a major contribution to the treasury resources from fuel taxes, Value Added Tax on electricity, levy on transmission bulk purchases of electricity, license fees and foreign exchange earnings from power exports (ERA, 2018; MEMD, 2018). On the demand side, the Committee on Electricity in Economic Growth, 1986 classified the relationship between economic growth and electricity consumption in two categories namely; the dependence of electricity consumption on economic and technical factors and the contribution of electricity to technical advances thus stimulating the economy through productivity gains.

Performance of the electricity sector has implications for industrial competitiveness, households’ welfare as well as medium long-term economic growth (ERA, 2018). For example, dependable supply of power and electricity use increases the rate of innovation which also increases economic growth. However, unreliable electricity supply coupled with high power tariffs still remain a hurdle for investors which in turn contribute to higher overall inflation, reduced aggregate demand thus limiting private sector competiveness and growth (Mawejje, Munyambonera, & Bategeka, 2013; World Bank, 2013).

Electricity consumption model

Literature identifies two contrasting theoretical arguments regarding the relationship between energy use and economic growth discussed below.

The Standard theory of growth by Solow (1956) places minor importance on the role of energy in production process and therefore in economic growth. It considers only capital and labor as the primary factors of production and energy is treated as an intermediate input which can be replaced by capital or labor, assuming a unity elasticity of substitution between factors of production. Hence energy has a negligible influence on production and economic growth. It further states that long run economic growth results from technological process and accumulation of labor and capital inputs. Model is specified as follows;

……………………………………….…………….. (1)

Where Y represents total output of the economy, K represents capital units, L is labor units and A is technology.

Solow’s theory, however, did not explain the origins of this technology progress and empirically it is measured as a residual of economic growth not accounted for by labor and capital. Therefore, in this way, this growth model does not take into account the role of energy use in its explanation of economic growth.

This limitation led to the Endogenous growth model which explains technological progress as an intended result of deliberate actions of economic agents driven by financial incentives (Romer, 1994). The model specification includes technology as a decision variable, i.e.

………………..………………………….………. (2)

On the other hand, Resource and Ecological economists have criticized the theory that energy plays a minor role in economic growth on a number of grounds, especially the implications of thermodynamics for economic production and the long-term prospects of the economy, Stern and Cleveland (2004); Kummel et al (2010); Hall et al (2001); and Stern (2010). They argue that energy is a critical primary factor of production basing on the definition of a primary factor of production offered by the Neo-classical economic growth theory, that is, that factor of production that is neither created nor used up within the production process, only degraded.

The Ecological growth model presents 3 channels through which energy influences economic growth;

• For any production to take place, energy is required to activate capital, and in this way directly increasing economic growth. It is energy, capital and labor that are active in value addition.
• Energy increases productivity of labor and capital. It speeds up production processes thus increasing the volume of output per unit of capital or labor which in turn reduces cost of production and permits savings and further investments.
• A dependable supply and consumption of quality energy increases the rate of innovation which also increases economic growth.

Although theoretical debate between the Ecological economic theory and Neo-classical economic theory of growth seems to be inconclusive regarding the role of energy, the work of Stern (2010), seems to reconcile the two. He extended the Neo-classical growth model by adding the energy variable in a nested CES production function as follows;

……………………………….. (3)

Where  and  is the elasticity of substitution between energy and non-energy inputs, is a measure of the relative influence of energy and non-energy inputs on economic growth, and  are labor and energy augmenting parameters respectively. However, Stern did not explain why there is no capital augmenting parameter in his model.

From equation 3 above, the relationship between energy and an aggregate of output such as GDP can then be affected by substitution between energy and other inputs, technological change (that is, a change in A), shifts in the composition of the energy input, and shifts in the composition of output. Also, shifts in the mix of the other inputs for example, shift to a more capital-intensive economy from a more labor-intensive economy can affect the relationship between energy and output (Stern et al, 2017).

The Ecological growth theory assumes that  (which places a restriction in the model that at least some positive quantity of energy is required for production to take place), while elasticity of capital and labor is one as in the neoclassical growth model. This means that if energy supply is in deficit, it seriously constrains production and therefore economic growth and when it is in abundance, it ceases to be a constraint on production and economic growth, hence economic growth will be constrained by augments of capital and labor as in the neoclassical growth theory. In other words, the neoclassical growth theory assumes that energy is in abundance across all nations hence not considered as a limiting factor to economic growth, which isn’t the case for Uganda, an energy scarce economy.

Therefore, theoretical literature succeeded in reconciling the ecological economists and neoclassical growth theory in their perspectives regarding the role energy plays in growth of the economy. Energy use is recognized to be very vital for economic growth, such that a reduction in energy use will heavily constrain economic growth. Hence following the theoretical model in equation 3 above, the theoretical framework that will inform the analysis of the relationship between economic growth and electricity use is specified as follows;

…………………………………………… (4)

The labor and capital augmenting parameters that capture the indirect impact in this relationship have been dropped because the study is restricted to analyzing only the direct relationship between economic growth and electricity consumption.

3.1.2 Theories of Demand

A static model of representative firm

This is a short run model of energy demand for both a firm and household however, the discussion will be confined to a firm’s problem. A firm problem is generally considered as profit maximization for a given level of output; since energy is treated as an input therefore the problem of the firm is cost minimization to maintain same level of output. The firm demand for energy is given as a function of its output, prices of all inputs with energy inclusive. A firm seeks to minimize cost for a given level of output, such that output (Q) is a function of capital
(K), labor (L), energy (E) and materials (M):

………………………………………………………………………… (5)

Whereas costs are sum of payments to the factors of production;

…………………………………………………………… (6)

Where r is rent payment to capital, w is wage to labor, PE is a price of energy and PM is the price of materials inputs. So a firm problem is:

Subject to;

……………………………………………………………………..…… (7)

However, the total cost of capital incorporates energy utilization cost  then, the equation for energy use above enters the constraint hence the firm problem can be restated as:

……………….. (8)

Where  is a cost of efficiency improvements, therefore the first order condition for the solution of minimization problem is that firm will choose input K, L, E, M and  (efficiency of capital) and capital utilization rate u. In general form it is given as:

…………………………………………………………………….. (9)

However, in the short run firms can only adjust capital utilization rate of deployed capital when capital and technology are fixed. Thus an expression for a firms short run demand for energy is given as;

……………………………………………………….. (10)

The static model however ignores the intertemporal choices aspects of the choices that an energy
consumer faces when choosing type of capital, utilization rate of capital and efficiency of capital. The model treats long and short run responses as equivalent such that it does not incorporate size and characteristics of energy-using capital stock.

Electricity Dynamic models of the household

These models considers the intertemporal choices that a consumer, or firm must make when choosing their optimal objective function. The model captures the three simultaneous decisions to consume energy, which is decision to purchase and maintain energy-using capital equipment; of which the latter is an investment problem. A household problem is a utility maximization of the representative consumer, and energy is consumed in proportional to the services it renders hence utility of a consumer is affected by energy demand. Therefore, consumers seek to maximize discounted present value of lifetime utility.

………………………………………………………… (11)

Subjected to the constraint that purchases of energy E, other consumption goods Ct, investment good It, capital stock Kt and savings St in each period cannot exceed this period’s income Y plus the returns on the last period savings. Depreciation rate of capital is  savings earn a rate of return r, and the discount rate is such that. Therefore, the consumer’s problem is therefore formulated as:

Subject to

…………………………………………… (12)

Note that the above equation is enters the consumer’s problem through a second constraint that show how the relationship between energy and capital is accounted for. Substituting the above constraint into the utility function, and the first-order condition for the maximum for the consumer’s problem is;

…………………………………………….. (13)

Asterisk denotes optimal values; the consumer will allocate income among purchases of energy,
capital, savings and all other goods such that the marginal value of the energy services accrued from capital stock is equal to the marginal value of consumption of all other goods. However, the consumer is interested in energy services then the decision is on the condition that there is energy cost of capital utilization. Therefore, the term in the brackets is the user cost capital defined as;

…………………………………………………………. (14)

So  is the user cost of capital stock and the first term  indicates consumer choice of the user cost such that capital utilization is a choice variable. Thus the whole set of first-order condition for this consumer’s problem has a system of simultaneous equations that can be solved for each choice variable. Then, after we obtain the solution for and for a given , then solution for energy consumption can be obtained using the energy use expression and the optimal level of energy demand is derived from optimal capital utilization rate, optimal size of the capital stock and efficiency. Energy demand is a function of user cost of capital, capital stocks and capacity utilization. Generally, user cost of capital is a function of energy price, energy efficiency, and the rental price of capital. Whereas, capital stocks are a function of the rental price of capital and income and capacity utilization is a function of energy price and income. Then, the general function of energy demand can be expressed as;

…………………………………………………………… (15)

Energy consumption is modeled as a function of dynamic response to price and income changes, and since long run price elasticity is different for its short run value because price adjustments takes longer to be felt then past prices also affect current consumption of energy.

Since in most developing countries, the public sector plays an important role in allocating available supplies to end uses of energy, therefore instead of relying on trans-log cost function a simple model of energy consumption behavior is used (Rahman, 1982).

……..…………………………………………………….. (16)

Where the current consumption of energy is, is the lagged prices,  is past consumption of energy and is output and e is the error term.

The consumption equation uses a simpler model that considers dynamic responses to prices and income changes. The use of a simple model is attributed by the fact that in most developing economies, the public sector plays a dominant role in allocating supplies to end uses of energy, instead of using trans-log cost functions or multinomial logit models for fuel choices, (Rahman, 1982).

Empirical Literature

Numerous ideas and views exist about the potential linkages between energy and economic growth. Following earlier studies of (Kraft & Kraft, 1978), literature identifies four hypotheses that describe the types of causal relationships between electricity consumption and economic growth which are summarized below (Ozturk, 2010; Payne, 2010; Rögnvaldur, 2009; Shahateet, 2014). These are discussed below;

The neutrality hypothesis

The neutrality hypothesis assumes no causal link between energy consumption and economic growth. An increase or decrease in energy use will not affect economic growth and vice-versa. The empirical confirmation of the neutrality hypothesis is usually interpreted to imply that neither conservation nor expansive policies in relation to electricity consumption have any effect on economic growth. A number of studies have confirmed the neutrality hypothesis such as (Payne, 2010) who used Yoda–Yamamoto causality test on USA, (Ozturk & Acaravci, 2011) who used ARDL bounds testing procedure on 11 Middle East and North Africa (MENA) countries among others.

The growth hypothesis

The growth hypothesis assumes a unidirectional causal link from energy consumption to economic growth. It states that the economy depends on energy consumption for economic growth so that the more energy the economy consumes, the more the economy will grow. Hence energy consumption drives economic growth. This relationship suggests that shocks to electricity consumption may adversely affect growth, while expanding energy consumption may lead to the expansion of the economy. A number of studies have confirmed the growth hypothesis in developing countries. (Akinlo, 2008) investigated the causality relationship between energy consumption and economic growth for Nigeria and showed that there is a unidirectional Granger causality running from electricity consumption to real GDP. Similar findings in developing countries have been documented by (Odhiambo, 2009a) who used ARDL methods on Tanzania; (Odhiambo, 2010) who used ARDL methods in a tri-variate framework for South Africa, Kenya and DRC and found the growth hypothesis to hold for South Africa and Kenya.

The conservation hypothesis

The conservation hypothesis assumes a unidirectional causal link from economic growth to energy consumption. However, this hypothesis differs from the growth hypothesis as it postulates that energy consumption depends on the growth of the economy such that as the economy grows, the more energy will be demanded and consumed to support that kind of growth. This implies that the economy does not strongly depend on energy consumption for growth and that any policies concerning electricity may be implemented with minimal effects on economic growth. Some of the empirical studies that support this hypothesis include; (Odhiambo, 2010) used ARDL methods to show that it is economic growth driving energy consumption in the Democratic Republic of Congo (DRC). Other studies include (Ghosh, 2002) for India, (Adom, 2011).

The feedback hypothesis

The feedback hypothesis assumes bidirectional causal links between energy consumption and economic growth. Changes in energy consumption will have an effect on economic growth whilst changes in economic growth will impact the demand for energy. In other words, efficient energy use and energy development policies geared toward increasing electricity generation can impact positively on economic growth. In the same way, electricity shocks hurt GDP growth and GDP shocks simultaneously hurt energy consumption. (Odhiambo, 2009b) uncovered a bidirectional Granger causality relationship between GDP and electricity consumption in South Africa using employment as an intermittent variable in a simple tri-variate framework. Similar findings discussing a bidirectional relationship have been documented for Malawi (Jumbe, 2004); India (Paul & Bhattacharya, 2004); and Uganda (Sekantsiand & Motlokoa, 2015); among other developing countries.

The inconclusive results of the earlier tests of Granger causality are probably due to the omission of necessary variables, either the quantities of other inputs (and quality adjustment of the energy input) or energy prices especially due to availability of data (Stern, 2010).