Electricity Consumption and Economic Growth in Iraq Harry H. Istepanian *

Luay J. Al-Khatteeb

Independent Power Consultant, Washington, DC Senior Fellow, Iraq Energy Institute (IEI) [email protected]

Executive Director, Iraq Energy Institute (IEI), London, UK Visiting Fellow, Brookings Doha Centre [email protected]

Abstract - This study investigates the causality between Iraq’s electricity consumption and economic growth since the 2003 war. The influence of selected economic and demographic variables on the annual electricity consumption is investigated using multiple linear regression analysis for population, gross domestic product, consumer price index, and housing stock. It was found that the electricity consumption is correlated effectively and confirms the long-term equilibrium relationship between electricity consumption and economic growth. Forecasts made using the present model are compared with available national forecasts. Demand is expected to grow at an accelerated rate in the future, which calls for a comprehensive electricity policy review to confront the country’s severe electricity crisis. Index Terms - Economic Growth, Electricity Consumption, Iraq.

*

Corresponding author.

I.

INTRODUCTION

consumption per capita has remained almost at

Iraq’s news was back again to the headlines in

the same level since the 1980s, despite the fact

June 2014, when one-third of the country fell

that electricity consumption has grown from

into the hands of the Islamic State (IS) militants.

1,200 MW in 1980 to 11,400 MW in 2013, with

There has been increasing interest in Iraq’s huge

an average growth in electricity demand around

potential of oil and gas reserves during the past

9.5 percent per annum since 2003. Meanwhile,

10 years, despite the security turbulence and

the gross domestic product (GDP) for 2013 was

political uncertainty of the country. The

recorded as the highest in the history of Iraq

economic development since the 2003 war was

($144 billion), increasing by an average 26

hindered

poor

percent per year since 2003. The strong growth

infrastructure and widespread corruption. The

is mainly due to the increase in oil exports,

electricity crisis has been one of the major

which jumped from 1.3 million in 2003 to more

challenges of successive Iraqi governments,

than 3.5 million barrels per day in 2013.

by

sectarian

conflict,

triggering public anger at the Ministry of Electricity’s failure to solve the problem. With the escalated war with militants in several northern and western provinces, the electricity shortage has been put on the back burner until the security and humanitarian turmoil is ended, but it is expected to widen, especially with many on-going projects being brought to a

However,

the

government

has

been

unsuccessful so far in reducing the gap between generation

and

demand,

despite

huge

investment in the sector’s development (more than US $40 billion during the period 2004 – 2012). Many suggest that the poor performance of

Iraq’s

electricity

sector

is

intimately

connected to centralization, lack of strong legal,

standstill due to military operations [1].

regulatory, political, and economic institutions Many international organizations such the

rife with irregularities, bureaucracy, corruption,

World Bank view the role of electricity sectors

low efficiency, and despotic policies [8].

as a vital driving engine in accelerating countries’ economy as several studies have found a positive connection between electricity consumption and the economic growth [2]. The prediction of electricity demand is one of the major challenges for reconstruction planners mainly driven by positive growth of economies after wars since several studies in the past have shown

that

bidirectional

there

is

causality

unidirectional between

or

electricity

consumption and economic growth of post war countries such as Lebanon [3] [4] [5], Kosovo

II.

THE ECONOMIC FRAMEWORK

The development of the mathematical model of the electricity consumption forecast for Iraq is complex due to the presence of a high level of suppressed demand and the lack of accurate historical data for real consumption. The data used in this report is mainly taken from the publications of the Ministry of Electricity and international institutions such as the World Bank, the United Nations and the International Energy Agency (IEA), with consideration of the suppression in the demand based on empirical

[6], Afghanistan [7].

results of site surveys conducted on actual According to the World Bank, Iraq has the lowest power consumption per capita at 1,068 kWh (2011) compared to its neighbouring countries.

The

suppressed

electricity

average consumption of Iraqi households.

A. Population

GDP (Current $billions) GDP (Current $Billions)

Iraq had a population of 33.3 million as of June 2011 according to the UN, and expected to reach 55.85 million by 2030 (Fig. 1)†. The growth in population is one of the contributing factors in the increasing demand for electricity, and will exert tremendous pressure on the

160.00 140.00 120.00 100.00 80.00 60.00 40.00 20.00 0.00

financial resources of the country. Hence,

Year

careful planning for the utilisation the natural resources is vital to manage the sustainable

Fig. 2 Iraq’s GDP Growth (2003 – 2013)

growth in the demand for electricity for the next two decades.

The current conflict in the northern and western

Population (Millions)

provinces has caused a tremendous setback to 38 36 34 32 30 28 26 24 22 20

the

government’s

social

and

economic

development plans, including the electricity sector. In this study, we have used the forecast data of pre-2014 conflict developed by the International Energy Agency (IEA) as the basis for future GDP growth [9]. This forecast estimates that the central scenario for GDP Year

growth will be 10.6 percent per annum during 2010-2020, and is expected to decline gradually

Fig. 1 Iraq’s Estimated Population (2003 – 2013)

B. Gross Domestic Product

thereafter, to settle at around 8.78 percent in the next two decades [10]. We have assumed that the growth rate is for aggregated residential and

Iraq’s GDP growth rate has been one of the fastest in the world since 2003. However, it has been distinctively volatile due to dependence on oil exportation (Figure 2). As the world demand for oil changes, it will be difficult to accurately forecast the exact growth in Iraq’s GDP. Nevertheless, the annual growth has almost

commercial consumers. The growth rate for industrial and agricultural sectors is currently at very low levels, but is expected to increase its share in the economy with the government’s future plans to diversify the economy and reinforce the importance of the growth of nonoil economic sectors [11, p. 39].

been close to two digits for the past several years and is expected to maintain over the next few years, unless the current conflict continues for a longer period.

C. Consumer Price Index According to the Ministry of Planning, the expenditure weight for electricity in the Consumer Price Index (CPI) for goods and services is at 2.275% (July 2014) for the base year 2007, as that is the year when the latest

†

Source: United Nations, World Population Prospects: The 2012 Revision. http://esa.un.org/wpp/ExcelData/population.htm

household social and economical survey was

conducted in Iraq ‡. The total consumption

number of customers is expected to increase

expenditure and CPI have been positively

from 3.94 million connected households to

trending after 2003 (Figure 3), due to the rapid

more than eight million over the next two

increase of goods imports, mainly household

decades. The electrification of urban areas will

consumer and electrical appliances. The total

continue to expand as more newly built houses

consumption expenditure, which consists of

will be required over the coming years. By the

aggregated expenditure for electricity and

end of 2016, Iraq needs to build two million

electrical goods, has been increasing on average

new housing units and continue to construct

of 16.45 percent per annum since 2003. This

650,000

increase is mainly due to the hike in public

accommodate

sector salaries. The deregulation of goods

according to the Construction and Housing

importation and the relatively stable Iraqi dinar

Ministry and Ministry of Planning’s data [12].

have also contributed in inducing the electrical

Figure 4 shows the forecast on the demand for

appliances market.

housing, which is expected to reach 8.40 million

units

each the

year

in

increasing

order

to

population,

by 2030. The high demand for electricity has pushed unit Housing Stock (Thousands)

prices for electricity paid to the private generator owners to more than US ¢13/kWh, compared to government-sold electricity for less than US ¢1/kWh, on average. The average household pays an electricity bill that ranges between US $200 – US $400 per month, which

9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 2003

2009

2015

is considered one of the highest in the region

2021

2027

Year

[8]. Fig. 4 Iraq’s Housing Stock Forecast.

CPI (2005=100)

300.00

DATA AND METHODOLOGY

III.

250.00 200.00

The forecasting method used for the demand

150.00

estimation is based on a common econometric

100.00

approach. The applied methodology correlates

50.00

between explanatory and target parameters

0.00 2002

using multiple linear regression technique [13, 2004

2006

2008

2010

2012

2014

Year

14,

15]. The

approach uses four

main

explanatory variables, (a) population, (b) GDP, Fig. 3 Iraq’s CPI (2003 – 2013).

(c) consumer price index and (d) housing stock, since the main demand for electricity is

D. Housing Stock

expected to be in the residential sector. In this

It is envisaged that 97 percent of the households

study, we consider the high shortage in housing

will be connected to the electricity grid by 2030,

units, as we believe it will exert additional

compared to 81 percent in 2013. Hence, the

pressure

on the

expansion of electricity

production in the next two decades, and will ‡

http://cosit.gov.iq/en/

subsequently

cause

an

increase

in

the

connection rate of households across the

The Table clearly demonstrates that the

country.

independent variables are highly correlated to the dependent variables (electricity demand)

The annual growth of expected electricity consumption

in

the

residential

sector

is

and therefore are significant in their use in the forecasting model.

expressed by the following equation: 𝑌 = 𝑎 + 𝑏1 𝑋1 + 𝑏2 𝑋2 + 𝑏3 𝑋3 + 𝑏4 𝑋4 + 𝑢 (1) Where

The coefficients a, b 1 , b 2 , b 3 and b 4 , Eq. (1), for electricity demand are obtained by multiple linear regression using 10 years’ of data from 2003 to 2013 for each of the variables. The

Y is the electricity demand or consumption

resulting model is:

(GW), X 1 is population (millions), X 2 is GDP

𝑌 = −18.048133 + 0.7135518 𝑋1 −

(US $ billions), X 3 is CPI Indices (2005=100), X 4 is the housing stock (thousands) and u is a

0.0401653 𝑋2 − 0.00910352 𝑋3 + 6.33 ×

dependent variable Y other than the independent

10−6 𝑋4

variables (𝑋 i ).

GDP (X 2 ) and CPI (X 3 ) are estimated using

disturbance

factor

which

influences

the

R

(6)

The independent variables population (X 1 ), multiple regression method. The resulting

Each of the independent variables X 1 , X 2 , X 3

equations for the forecasts of X 1 , X 2 and X 3 are:

and X 4 are obtained using simple and multiple linear regression applied to data sets of these variables over time (t).

X 2 = 0.137 × t2 + 1.4555 × t + 38.942

𝑋1 = 𝛼01 + 𝛼11 × 𝑡

(2)

𝑋2 = 𝛽02 + 𝛽12 × 𝑡 + 𝛽22 × 𝑡 2

𝑋3 = 𝛾03 + 𝛾13 × 𝑡 + 𝛾23 × 𝑡 2 𝑋4 = 𝜆04 + 𝜆14 × 𝑡 + 𝜆24 × 𝑡

X 1 = 0.8456 × t + 22.897

2

(3) (4) (5)

Where

𝛼01 , 𝛼11 , 𝛽12 , 𝛽22 , 𝛾03 , 𝛾13 , 𝛾23 , 𝜆04 , 𝜆14 , and 𝜆24

X 3 = -0.1948 × t2 + 20.401 × t + 6.8318 X 4 = -3.2026 × t2 + 303.27× t + 2216 Where t is the observation (integer) for the years from 2003 to 2013. Tables II and III show the ANOVA validity test results for the multiple linear regression model and regression statistics.

are the constants of the respective regression.

Various statistical tests are used to validate the

Various statistical tests are used to validate the

model, including the adjusted coefficient of

model, including the adjusted coefficient of

determination (R2 = 0.987) to determine how

determination r2 to determine how well the

well the model explains the actual consumption

model explains the actual consumption data, an

data, an F-test for overall significance of the

F-test for overall significance of the model and

model, and a t-test for testing the strength of

a t-test for testing the strength of each of the

each of the individual coefficients of the model.

individual coefficients of the model.

The calculations show that the significant value of F is much smaller than the calculated F

Table I shows the correlation matrix for the variables used in the multiple linear regression analysis for modelling data from 2003 to 2013.

value. Hence, it can be concluded that the multiple linear regression Eq. (6) is significant even at the 99% confidence level. Also, the

demand model developed is good with adjusted 2

methodology is 47 percent higher (median)

R of 0.979, as the electricity consumption has

than originally anticipated by the Ministry’s

been growing rapidly post 2003 mainly due to

Master Plan by year 2030, and is much closer

higher income of middle class families who are

to the Ministry’s higher based forecast§.

mainly

government

employees

and

the 60

the years of civil conflict (2006 – 2008), the

50

Electricity Demand (GW)

widespread use of cooling appliances. During

country’s GDP dropped down by 15 per cent but it had less impact on the electricity demand. Fig. 5 shows the actual electricity consumption

40 30 20 10

along with the estimated values using the model 0 2003

developed. As it can be seen, appropriate fit of

2008

2013

2018

2023

2028

Year

the historical data is shown with the residual produced by this model is also well performed.

Demand (GW)

Figure 6. Comparison of Forecasts for Electricity Demand (2003 – 2030).

30 Electricity Demand (GW)

MoE Demand Forecast (GW)

25 20 15

The forecasts made by the Ministry of

10

Electricity and Parsons Brinckerhoff, using the

5

WASP least cost analysis computer program

0 2002

2004

2006

2008

2010

2012

2014

supplied by the IAEA [16], concludes that peak

Year

demand is predicted to rise from around 11 GW Predicted Demand (GW)

Actual Demand (GW)

in 2010 (Iraq excluding the Kurdistan region) to about 32.5 GW by 2030 in the base case

Figure 5. The Actual and Estimated Electricity Demand.

forecast. The estimated demand for KRG is expected to reach 3,699 MW by 2030. Hence,

IV.

EMPIRICAL RESULTS

total electricity demand is expected to reach

There is a general consents among the

more than 36 GW according to the Ministry in

observers of Iraq electricity sector that the

2030. There is no doubt that in order to

integrity of the published data on Iraq’s annual

adequately address the huge shortage of power

electricity consumption are doubtful since they

capacity, and improve the supply-side of the

reflect the suppressed demand rather than the

electricity sector, will require further studies on

actual and does not take into account the actual

predicting

peak consumption of households especially

economic development of the country. Such

during summer days will increase, as more

studies will substantially enhance the sector’s

Iraqis want cooler houses with outdoor

effectiveness in providing better services to

temperatures reaching close to 50 degree

Iraqis in the future.

future

demand

based

on

the

Celsius. The results obtained from this study show

that

the

demand

will

increase

substantially over the next two decades, to reach 52.2 GW in 2030 as depicted in Figure 6. The demand estimation using the current

§

The KRG Master Plan estimates for the base case load forecast that the three Governorates, Duhok, Arbīl, and AsSulaymāniyyah ,are added to the Ministry’s Master Plan data to determine the total demand for Iraq’s eighteen provinces until 2030.

V. Electricity

CONCLUSIONS

consumption

[8]

forecasting

Electricity Journal, vol. 27, no. 4, pp. 51 - 69, May

model

2014.

based on economic factors for Iraq using multiple linear regression has been proposed. The model performed effectively in the statistical

tests

conducted,

implying

H. H. Istepanian, "Iraq’s Electricity Crisis," The

[9]

IEA, "Iraq Energy Outlook: World Energy Outlook Special Report," IEA, Paris, France, 2012.

its [10] IEA, "Iraq Energy Outlook - World Energy Outlook

significance

in

forecasting

electricity

consumption using the explaining variables

Special Report," International Energy Agency, Paris, 2012.

considered. Comparison of the model has been made with the national forecasts available from the Ministry of Electricity. The comparison

[11] Ministry of Planning, "National Development Plan for the Years 2010-2014," Republic of Iraq, Baghdad, 2010.

revealed that the forecast made by the regression model is higher than originally anticipated by the Ministry’s forecast in 2010.

Jeddah Economic Forum, 2013. [13] A. R. F. Al-Faris, "The Demand for Electricity in the

REFERENCES [1]

[12] Ernst & Young , "Housing the Growing Population,"

GCC Countries," Energy Policy, vol. 30, p. 117–124,

J. Sachs, S. Asad and H. Qaragholi, "Iraq’s Power

2002.

Crisis and the Need to Re-Engage the Private Sector – Smartly," MEES, 2011.

[14] E. Ziramba, "The Demand for Residential Electricity in South Africa," Energy Policy, vol. 36, pp. 3460-

[2]

World Bank, "Toward a Sustainable Energy Future for

3466, 2008.

All: Directions for the World Bank Group’s Energy Sector," World Bank, Washington DC, 2013.

[15] G. D. Vita, K. Endresen and L. C. Hunt, "An Empirical Analysis of Energy Demand in Namibia,"

[3]

L.

Dagher

and

T.

Yacoubian,

"The

Causal

Relationship Between Energy Consumption and

Energy Policy, vol. 34, no. 18, pp. 3447-3463, December 2006.

Economic Growth," Energy Policy, vol. 50, no. C, pp. 795 - 801, 2012.

[16] Parsons Brinckerhoff, "Iraq Electricity Master Plan, Final Report," Ministry of Electricity, 2010.

[4]

G. Nasr, E. Badri and G. Dibeh, "Econometric Modeling of Electricity Consumption in Post-War Lebanon," Energy Economics, vol. 22, no. 6, pp. 627 640, 2000.

[5]

S. Abosedra, A. Dah and S. Ghosh, "Electricity Consumption and Economic Growth, the case of," Applied Energy, vol. 86, no. 4, pp. 429 - 432, 2009.

[6]

A. Nysret and A. Hamiti, "The New Generation Investment and Electricity Market Development in Kosovo," in 8th International Conference on the European Energy Market (EEM), Zagreb, Croatia, 2011.

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M. I. Khan, "Power Sector Strategy for the Afghanistan

National

Development

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Ministry of Energy & Water, Kapul, Afghanistan, 2007.

TABLE I CORRELATION MATRIX FOR VARIABLES USED IN MULTIPLE LINEAR REGRESSIONS Demand (GW)

Population (millions)

GDP (Current $Billions)

CPI Indices (2005=100)

Demand (GW)

1

Population (millions)

0.991089354

1

GDP (Current $Billions)

0.937935388

0.958112434

1

CPI Indices (2005=100)

0.952964033

0.973771559

0.947222119

1

Housing Stock (Thousands)

0.943725315

0.962363939

0.99499018

0.962694815

Housing Stock (Thousands)

1

TABLE II ANOVA VALIDITY TEST RESULTS FOR MULTIPLE REGRESSION MODEL ANOVA df

SS

MS

F

Significance F

Regression

4

267.13390

66.78347

118.66540

7.70744E-06

Residual

6

3.3767284

0.5627880

Total

10

270.51062

Coefficients

Standard Error

t Stat

P-value

Lower 95%

Upper 95%

Intercept

-53.209007

12.124766

-4.3884560

0.004625697

-82.8772433

-23.540771

Population (millions)

2.2334263

0.3951425

5.6522034

0.001316314

1.26654724

3.2003054

GDP (Current $Billions)

-0.063247

0.0622751

-1.0156065

0.349006981

-0.215628881

0.0891347

CPI Indices (2005=100)

-0.0264509

0.0201133

-1.31509720

0.236499798

-0.075666545

0.0227645

Housing Stock (Thousands)

0.0026092

0.0030386

0.8586715

0.4234928

-0.004826113

0.0100445

TABLE III REGRESSION STATISTICS FOR MULTIPLE REGRESSION MODEL Multiple R

0.993739003

2

R

0.987517206 2

Adjusted R

0.979195343

Standard Error

0.750192028

Observations

11