Determinant of energy consumption in Rwanda

Abstract

Energy has been criticized as the world`s challenge in the next century and Energy consumption increasing rapidly according to the rapid technological growth. However, there is a huge empirical claiming the determinants of energy demand. In Sub-Saharan countries context there is scarce empirical study that provide great insight on the determinants of energy usage. This thesis adds to the existing literature `by studying the determinants of energy demand in Rwanda for the period 1990-2019. An OLS baseline model is employed to examine determinants of energy consumption in Rwanda. Building on the baseline model, causal estimation techniques are employed to study the causal relationship between energy demand (total final energy consumption) and identified control variables. Both short-run and long-run correlation between energy usage and its determinants using granger causality and ARDL model. The methodological and empirical analysis of this study is embedded in the theoretical framework of the neoclassical growth model and the endogenous growth model. The OLS results imply that 1% rise in GDP per capita increases total energy consumption by 168.9% percentage growth, 1 unit increase in population growth increases total final energy consumption by 0.05 percentage growth, 1% increase on urban population growth, increases energy consumption increase by 19% per annum while foreign direct investment and industrialization adversely affect energy consumption. ARDL bound test cointegration to confirm the existence of cointegration among variables and ARDL model findings imply that, in short-run urbanization statistically and significantly has a favourable effect on total final energy consumption while GDP per capita, population growth, industrialization and FDI does not have an evidence short-run effect on total final energy consumption. In long run, the total final energy consumption statistically and significantly is positively correlated with industrialization, population growth, urbanization and FDI, and statistically and insignificantly GDP per capita has a long-run impact on total final energy consumption. The causation tests show that there is unidirectional causality runs from GDP per capita to energy demand and bidirectional causality from population growth and urbanization to energy usage and there is no causality between industrialization, FDI and total final energy usage The findings suggest that to raise economic growth policy makers must ensure that the growth of energy consumption is less than the growth of energy supply and energy efficiency building policy is needful in new and residential buildings to reduce energy consumption in urbanized areas.