Macroeconomic Indicators for Electrical Consumption Demand Model in Malaysia

Abdul Rahim Ridzuan, Mahirah Kamaluddin, Nor Asmat Ismail, Mohamad Idham Md Razak, Nazatul Faizah Haron


Malaysia has pledged to reduce carbon emissions by 45% in year 2030 and to attain a completely carbon neutral status by year 2050. For those purposes, substantial measures and policies have been implemented geared towards green growth and sustainability, as stipulated in the 9th, 10th, and 11th Malaysia Plans commencing from 2006 until 2020. Nevertheless, it is indeed a challenge in striking to achieve these targets due to reported increment in the total final energy consumption by 30% from 2010 until 2014. Demand for electricity in Malaysia has been expected to surge between 5% and 6% within these couple of years in line with nation urbanisation and economic progression. As such, a number of macroeconomic indicators that might have influenced Malaysia’s electrical consumption had been analysed for the 1970–2016 period by estimating electricity consumption per capita demand function linked with economic growth, foreign direct investment inflows, trade liberalisation, population growth, urbanisation population growth, financial development, industrialisation, inflation, and household consumption expenditure. The analysis was conducted by using the Autoregressive Distributed Lag model. The estimation outcomes revealed the roles of economic progression and urbanization that led to increment in electrical consumption, whereas financial deepening and higher inflation linked to reduction. Such results enlighten significant insights for policymakers. For instance, since electricity consumption rises with urbanisation, it is essential that energy-efficient appliances are made relatively affordable and readily available for urbanites. The central bank also should play its part by lowering the lending rates so as to allow the financial institutions across the nation to offer attractive loans with lower financing cost to firms associated to renewable energy. With more companies being involved in cleaner alternative energy production, the nation is deemed to minimise its carbon emissions by decreasing its dependence upon coal to generate electricity.

Keywords: Electricity Consumption;  Carbon Emissions; Autoregressive Distributed Lag (ARDL) Model.

JEL Classifications: O1, Q2, Q4


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