A Revision on the Regression Analysis on the Factors that Affect the Electric Power Consumption per capita in the

Philippines

In partial fulfillment of the course requirements in ECONMET

Submitted to:

Dr. Cesar Rufino

Submitted by:

Lean Marxelle Recoter 10933573 V24

December 14, 2012

TABLE OF CONTENTS
Page I. Introduction A. Background of the Study B. Statement of the Problem C. Objectives of the Study D. Significance of the Study E. Scope and Limitations of the Study II. Review of Related Literature A. Electric Power Consumption and Age Dependency Ratio B. Electric Power Consumption and Gross Domestic Product C. Electric Power Consumption and Gross Domestic Savings III. Operational Framework A. Presentation of Data B. Description of the Variables Used C. A-priori Expectations D. Introduction of Hypothesized Economic Model IV. Methodology A. Data B. Estimation and Inference Procedures V. Empirical Results and Interpretation 3 3 4 4 4 5 5 5 5 6 6 6 8 11 13 13 13 15 17

A. OLS Regression B. Test for Multicollinearity C. Test for Heteroscedasticity D. Test for Autocorrelation VI. Conclusion and Recommendation The Final Econometric Model VII. Bibliography

17 19 21 22 23 23 25

I.

Introduction

A. Background of the Study Waking up in a comfortable and cozy bed, you realize that everything around you is made with the help of electricity; the wooden bed frame, pillows, blanket, bed and your clothing. As you walk to the rest room, you would turn on the light bulb using the switch. You would brush your teeth and wash your face. As you go down for breakfast, the televisions turned on, mothers cooking the breakfast in an electric stove, youre drying your hair in the electric fan and the ovens toasting the bread. You dont need to go out of your house just to experience electricity. Electricity can be found in every part of the urban section of our country. Without electricity, urban settlers would find it difficult to live in their homes. With the high technology, businesses, schools, departments, and other facilities that run through electricity wont be able to do their part in contributing to our economy.

Electricity can be identified as a fundamental form of energy observable in positive and negative forms that occurs naturally (as in lightning) or is produced (as in a generator) and that is expressed in terms of the movement and interaction of electrons. (Electricity, Merriam-Webster Dictionary).

B. Statement of the Problem Though we can think of a lot of other factors that can affect the electric power consumption per capita, this analysis will try to prove whether the age dependency ratio, the gross domestic product per capita and the gross domestic savings can explain what will happen when we incorporate these factors with the electric power consumption per capita. Moreover, we want to know whether there exists a significant relationship between the given exogenous and endogenous variables.

C. Objectives of the Study The study is about electric power consumption per capita in the Philippines and how it may be affected when there occur changes in the age dependency ratio, gross domestic product per capita and gross domestic savings.

D. Significance of the Study With the factors affecting the electric power consumption per capita, we would learn that Filipinos, especially the non-working and still dependent, may find it hard to live without electricity. The increase in the gross domestic per capita would mean an increase in the
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consumption of electricity per capita, and there would be a decrease in its consumption when there is an increase in the gross domestic savings.

E. Scope and Limitations of the Study Since there are a lot of studies about the electric power consumption and its determinants in a lot of countries, this paper will study more on the Philippine setting. This is a time-series data with only 39 years from 1971 to 2009 were all indicators data gathered were from the World Bank. With other more important factors affecting consumption like prices, inflation and taxes, The World Bank could not provide such data from 1971 onwards. The sample size minimum cannot be accommodated if the adding of those data were insisted. The sample size may not be enough to represent the entire population of each factor.

II.

Review of Related Literature

A. Electric Power Consumption and Age Dependency Ratio Instead of considering the urban population of the Philippines from the previous paper, this paper will only consider the age structure of the Philippines population. To even out consumption, people tend to save/dissave at different ages in their entire life. (Modigliani) A research on the globalization and its implications on consumption, the Trends in Global Consumption Patterns: Role of Neighborhood Interactions, found out that the age dependency ratio has a negative effect on consumption levels. (Talukdar, 2011)

Zhu (2011) proves that the increase of Chinas savings rate in recent year s is due to the fact that the total dependency ratio of China decreased. The high savings rate now is the price paid for Chinas future demographic structure. (Zhu, 2011) B. Electric Power Consumption and Gross Domestic Product Jaunky (2006) states that the income elasticity of electric power consumption is established to be in great succession in the African Countries. Electricity consumption becomes a need when there is recession and becomes a want when there is a boom. He also says that electricity demand studies have useful applications. The estimation of consistent and stable income elasticity can be of crucial information for the private investors and African government planners considering any privatization program for electric utility sector. He also says that greater access to electricity would lead to the reduction of the reliance on biomass which will in turn lead to a more sustainable economic growth and a decline in environmental deterioration. (Jaunky, 2006) C. Electric Power Consumption and Gross Domestic Savings Unfortunately, there are no studies about the relationship between the electric power consumption and gross domestic savings. Comparing results would be impossible since it will be a first for this study.

III.

Operational Framework

A. Presentation of Data Year Electric power Age GDP per Gross

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consumption (kWh per capita)

dependency ratio (% of working-age population)

capita (current US$)

domestic savings (current US$)

1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987

238.125 263.093 325.157 312.508 317.562 332.323 331.119 331.254 348.03 376.148 339.531 340.183 364.493 343.123 351.878 312.872 320.861

94.8353 93.7391 92.7152 91.7519 90.8389 89.9848 89.1886 88.4214 87.6487 86.8505 86.0173 85.1623 84.3151 83.5122 82.7724 82.1022 81.481

203.05 213.538 260.987 346.702 364.22 406.463 454.128 510.282 600.97 689.496 736.514 746.277 649.093 597.161 568.597 537.809 581.911

1.6E+09 1.7E+09 2.7E+09 3.4E+09 3.7E+09 4.6E+09 5.4E+09 6E+09 7.1E+09 7.8E+09 8.6E+09 8.2E+09 7.6E+09 6.1E+09 5.1E+09 5.7E+09 5.9E+09

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

344.721 362.317 362.607 355.885 337.137 337.611 380.145 401.86 431.998 466.124 482.558 471.497 503.751 523.489 527.059 560.551 580.557 581.556 572.775 586.593 589.322

80.8693 80.2184 79.4996 78.7074 77.8608 76.9867 76.1197 75.2832 74.4778 73.696 72.9403 72.2117 71.5085 70.8334 70.1802 69.5289 68.8547 68.1417 67.389 66.6048 65.7957

646.818 708.381 719.009 719.236 819.316 821.596 946.553 1070.24 1169.65 1136.93 975.232 1096.81 1048.07 965.777 1009.02 1019.62 1088.57 1204.8 1402.85 1684.78 1925.21

7.6E+09 8.3E+09 8.1E+09 7.8E+09 8.7E+09 8.4E+09 1.1E+10 1.1E+10 1.3E+10 1.2E+10 1E+10 1.2E+10 1.3E+10 1.2E+10 1.3E+10 1.3E+10 1.5E+10 1.6E+10 2E+10 2.6E+10 2.9E+10

2009

593.459

64.9721

1835.64

2.6E+10

B. Description of the Variables Used For the succeeding discussions to be crystal clear, the variables that will be used will be explained in detail so as to not make the readers feel a foreigner when understanding the analysis part. There will be two kinds of variables that will be used: the exogenous or independent variable and the endogenous or the dependent variable. Independent variables are variables which are not affected by other variables in the model. Dependent variables are variables which can be affected by the independent variables in the model. The model determines the dependent variables and the independent variables are determined outside the model by other factors. In the table below, each variable will be dealt with in profundity. Variable Electric power consumption (kWhpc) Definition An endogenous variable in our model A quantitative variable Measures the production of power plants and combined heat and power plants less transmission, distribution, and transformation losses and own use by heat and power plants. Age dependency ratio (agedep) An exogenous variable in our model A quantitative variable Refers to ratio of dependents
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people younger than 15 or older than 64 to the working-age population those ages 15-64. The data are shown as the proportion of dependents per 100 working-age population as defined by World Bank. GDP per capita (gdppc) An exogenous variable in our model A quantitative variable It is gross domestic product divided by midyear population. GDP is the sum of gross value added by all resident producers in the economy plus any product taxes and minus any subsidies not included in the value of the products. It is calculated without making deductions for depreciation of fabricated assets or for depletion and degradation of natural resources. Data are in current U.S. dollars. Gross domestic savings (savings) An exogenous variable in our model A quantitative variable Calculated as GDP less final
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consumption expenditure (total consumption). Data are in current U.S. dollars.

Source: World Bank C. A-priori Expectations The variables agedep, gdppc and savings are presupposed to be the main factors affecting electric power consumption (kWh per capita) in the Philippine setting which is why they will be treated as statistically significant until disproven in this paper later. A-priori expectations are thoughts or hypotheses that are said to be true. We will base our a-priori expectations from the review of related literature that was given above. Although only the algebraic sign of the direction of the relationship between the endogenous and exogenous variables or the coefficients slope can be seen in a-priori expectation, not the magnitude of their relationship. These are the a-priori expectations. Variable Agedep Algebraic Sign ( - ) negative A-priori Expectation Age dependency ratio has a negative relation to electric power consumption (kWh per capita) because as the age dependency ratio increases, electricity will decrease. Gdppc ( + ) positive Gross domestic product per
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capita has also a positive relation to electric power consumption (kWh per capita) according to experts, since as the income per person increases, the kWh per person also increases. As what Jaunky (2006) said, electricity consumption becomes a necessity when there is a recession while it becomes a luxury when there is a boom. (Jaunky, 2006) Savings ( -) negative Gross Domestic Savings has a negative relation to electric power consumption (kWh per capita) because as you want to save income, the more you tend to decrease electric consumption to decrease the cost of paying for electricity.

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D. Introduction of Hypothesized Economic Model The combination of information of theories and concepts, researches and studies and apriori expectations proposed the model. The estimated model will be tested to look for the right answer. By the regression model, we will truly know if the a-priori expectations, that is, the age dependency ratio, gdp per capita and the savings were given the correct mathematical signs and that these variables really affect the electric power consumption per capita. The econometric model would be:

= 1 2 + 3 4 +

In this model, the lin-lin will be used to get the absolute change of the endogenous variable on the independent variables. It just means that the absolute change in kWhpc is estimated through the absolute changes in all the other factors: agedep, gdppc and savings.

IV.

Methodology

A. Data The dataset that will be used in this study was obtained by the researcher by downloading the Philippines database from the World Bank database. A total of 39 years was used since it is the widest and only available data given. The Electric power consumption (kWh per capita) = kWhpc; Age dependency ratio = agedep; Gross Domestic Product (GDP) per capita

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= gdppc; and The Gross Domestic Savings = savings. The savings did not have a per capita data so the total savings would be used instead. Heres the data:
kWhpc 238.125 263.093 325.157 312.508 317.562 332.323 331.119 331.254 348.03 376.148 339.531 340.184 364.493 343.123 351.878 312.872 320.861 344.721 362.317 362.607 agedep 94.83533 93.73913 92.71521 91.75193 90.83888 89.9848 89.18862 88.42143 87.64865 86.85054 86.01734 85.16229 84.31507 83.51217 82.77241 82.10221 81.48103 80.86928 80.21838 79.49959 gdppc 203.05 213.538 260.988 346.702 364.22 406.463 454.129 510.282 600.97 689.496 736.514 746.277 649.093 597.162 568.597 537.809 581.911 646.818 708.381 719.01 savings 1.6E+09 1.7E+09 2.7E+09 3.4E+09 3.7E+09 4.6E+09 5.4E+09 6E+09 7.1E+09 7.8E+09 8.6E+09 8.2E+09 7.6E+09 6.1E+09 5.1E+09 5.7E+09 5.9E+09 7.6E+09 8.3E+09 8.1E+09 Year 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990

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355.885 337.137 337.611 380.145 401.86 431.998 466.124 482.558 471.497 503.751 523.489 527.059 560.551 580.557 581.556 572.775 586.593 589.322 593.459

78.7074 77.86081 76.98665 76.1197 75.28316 74.47776 73.69598 72.94025 72.21166 71.50848 70.83336 70.18022 69.52893 68.85465 68.14169 67.389 66.60477 65.7957 64.97207

719.236 819.316 821.596 946.553 1070.24 1169.65 1136.93 975.232 1096.81 1048.07 965.777 1009.02 1019.62 1088.57 1204.8 1402.85 1684.78 1925.21 1835.64

7.8E+09 8.7E+09 8.4E+09 1.1E+10 1.1E+10 1.3E+10 1.2E+10 1E+10 1.2E+10 1.3E+10 1.2E+10 1.3E+10 1.3E+10 1.5E+10 1.6E+10 2E+10 2.6E+10 2.9E+10 2.6E+10

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

B. Estimation and Inference Procedures Before checking or testing for any violations to certain assumptions for the Classical Linear Regression Model (CLRM), the inferences that all assumptions should be satisfied. These

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assumptions are as follows: (1) the stochastic random variable (u) should be normal, (2) there should be no perfect multicollinearity among the exogenous variables, (3) there is equal variance for the stochastic random variable or homoscedasticity, and (4) there is no autocorrelation between the disturbances. The Ordinary Least Squares (OLS) regression will be used. Since the belief is that there is no violation on the CLRM assumptions, the OLS regression therefore, is the Best Linear Unbiased Estimator (BLUE). This will provide the model with the best estimates for the chosen variables of electric power consumption per capita which will be of help for the government and other concerned citizens. The finding of the minimum sum of the squares of the errors and the mean errors or residuals will lead to the best and most accurate estimates for the parameters of the model. With the help of both Gretl and Stata/SE 12.0, the parameters were estimated accurately and were presented in a tabular form together with the p-values, R-squared values, standard errors, and other important significance indicators and statistics that would help interpret the data. This study requires a 95% confidence interval (CI); since p-value lies between1 , its value in each variable should be less than or equal to 0.05. A p-value that is less than or equal to 0.05 would mean that the variable is significant and would indicate that the variable should be kept in the model. The R-squared provides the explanatory power of the model in determining the value of the endogenous variable. Its value should be a 100%; a 100% R-squared value means that the model has the best explanatory power. (Gujarati & Porter, 2009)

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There would be tests that would help detect violations in the model in order for us to get the correct interpretation of the model. These tests are: (1) Test for Multicollinearity, (2) Test for Heteroscedasticity and (3) Test for Autocorrelation.

V.

Empirical Results and Interpretation

A. OLS Regression The results for the regression of the model were obtained from Gretl, software for regressing data:

The regression has provided actual values for the unknown parameters. This is the initial model from primary OLS regression:

= 1206.1 9.81854 0.241055 + 1.803008 +

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We will focus on the p-value and R-squared values since the p-value determines the statistical significance of the parameter while the R-squared value speaks about the explanatory power of the estimated model. The R-squared value of the model is 0.887840 or 88.7840% which is nearer to 1 or 100%. It means that the estimated model is very powerful in explaining the effects of the regressors on the regressand. It can increase or decrease when a revision of work will be done, removing/adding variables that are/arent needed. The ad justed R-squared is 0.878226 or 87.8226% which is relatively somewhat lower than the original R-squared value. The p-value indicates how significant or dependable an estimate is with respect to the actual population. This is a reverse of the r-squared value, the smaller its value, the better the estimation result will be. This is due the fact that the level of doubt in estimating is parallel with the p-value. Therefore, the higher will be the confidence level. With the p-values given, every variable is very important in the model. The age dependency ratio provided 3 stars, which means that the coefficient is significant at the 1% confidence with a coefficient of 9.81854. This means that for every unit decrease in the age dependency ratio, the consumption of electric power per capita will increase by 9.81854 kWh. The savings also provided 3 stars, but is lesser than the age dependency ratio but still good enough for its p-value is lesser than 0.01 which means that it is also significant to the model at 1% confidence level. With a coefficient of 1.803008 , it would mean that for every US$ saved (since the data was in US$), consumption of electricity per capita will increase by 1.803008 kWh which is counter-intuitive because the a-priori expectation is that savings has a
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negative relationship with the consumption of electricity. But nonetheless, the increase in the consumption of electricity is not that significant. Although the p-value of Gross Domestic Product per capita is not as significant as compared to the two variables above, it still passed the 98% confidence interval and is more than our requirement, the 95% confidence interval. With a coefficient of 0.241055, for every unit increase in gdp, the consumption of electricity per capita would decrease by 0.241055. It defied Jaunkys research and our a-priori expectations with a 98.23% confidence interval. This means that there should be a recheck on the theories we use, or it is either some factors are not included in the regression. It is very heartwarming to know that the variables were almost in line with the a-priori expectations. In the first part, it was assumed that the CLRM does not violate any of its assumptions. There will be a test to verify that CLRM is not violated, and if it is, then corrective measures should be done. B. Test for Multicollinearity

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Multicollinearity means that the exogenous variables have a relationship and thus, will produce a suspect inference as discussed in the lecture. Since the collinearity is not tolerable and is very high with gdppc and savings, there are corrective measures that were discussed in the class: drop the culprit; it is the one with the highest VIF, which is gdppc. Dropping the gdppc from the model, the final OLS will be:

And the model will be: = 888.835 6.865056 6.317769 +

This means that the interpretations will change. The R-squared value of the model will be 0.867983 or 86.7983% which is less near to 100% but still a great percentage. The adjusted R-squared is 0.860649 or 86.0649% which is relatively somewhat lower than the original adjusted R-squared value.
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Surprisingly, the age dependency ratio still provided 3 stars and still the lowest for its pvalue which means that it is still as essential as ever. With the new coefficient of 6.86505 it would mean that for every increase in the age dependency ratio, the consumption of electric power per capita will decrease by 6.86505 kWh which is a lesser decrease in the consumption of electricity than the previous model. The savings still provided 3 stars, still significant at 1% confidence level. With the new coefficient of 6.317769 , it would mean that for every US$ saved, the consumption of electric power per capita will increase by 6.317769 kWh which is a lesser increase in the consumption of electricity than the previous model. C. Test for Heteroscedasticity

Heteroscedasticity is the absence of homoscedasticity, as discussed in class. It will create biased inference which is more dangerous than multicollinearity because the OLS will not be BLUE anymore. With the Breusch-Pagan test, the null hypothesis states that there is no heteroscedasticity. True enough, we should accept it since the p-value is greater than 0.05. This means that there is homoscedasticity.

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D. Test for Autocorrelation Kendall and Buckland (1971) said that, autocorrelation is the correlation between members of series of observations ordered in time or space. It can be present because of inertia or slowness of economic time series, and specification bias due to the omitted variables of the model (which in our case, the gdppc). (Gujarati & Porter, 2009)

With the help of Breusch-Godfrey test in Stata 12, we reject the null hypothesis since the p-value is less than 0.05 which means that there is autocorrelation in the model. With this, we correct the autocorrelation with the help of Prais-Winsten AR (1) regression:

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With this, the Durbin-Watson statistic before, this was 0.347650 and transformed to 1.846266 which is close to 2 and would mean that there is no more autocorrelation.

VI.

Conclusion and Recommendations

The Final Econometric Model will be: = 1253.373 10.75765 + 1.069 + With this, the study has revealed to us that at first, gdppc is important and does not violate any assumptions in the OLS regression. But as we go on, it violated an assumption which is essential in our research. Although it contradicts to one of the related literatures, I stick to savings since I did not find any research on that. It is therefore correct to say that the a-priori expectations were met, that an increase in the age dependency ratio would mean a decrease in the consumption of electric power per capita of 10.75765kWh and an increase in savings would result to an increase in kWh per capita consumption which is counter-intuitive but is still carefully correct to say that it did not defy our a-priori expectation since the increase in consumption of electricity is still minimal, 1.069 kWh. It just means that there is a negative linear relation with the age dependency ratio of the Philippines with the electricity consumption. Dependent people, may it be young or old, to the working people would prefer to use electricity more moderately as the age dependency ratio increases. It is essential for them since they live in high-technology, electricity requiring

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environment, that having a brownout for just 10mins would be very inconvenient for the rest of them. Also, if there is a constraint in the budget, there should be a decrease in the kWh per capita consumption. You cant live luxurious when there is a recession, unless youre very rich that is. But still, when you save, you try to decrease any unnecessary consumption of goods that you can live without in order to save more. Although, with all the cure and correction that were done, the explanatory power of this model went to trash. R-squared and Adjusted R-squared became 30+% which makes the model suck. For the recommendation, the next researcher, should there be one, must find the per capita of savings in order to know the difference with the savings in total. Also, the researcher must find the data for prices, inflation and taxes that would help widen the idea on kWh per capita consumption. Also, if there would be data in peso, kindly do so, so that readers will not have a hard time converting the US$ into peso anymore.

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VII. Bibliography
Electricity. (n.d.). Retrieved December 14, 2012, from Merriam-Webster: http://www.merriamwebster.com/dictionary/electricity Gujarati, D., & Porter, D. (2009). Basic Econometrics Fifth Edition. Singapore: McGrawHill/Irwin. Jaunky, V. (2006, December). Income Elasticities of Electric Power Consumption: Evidence from African Countries. Mauritius. Kendall, M., & Buckland, W. (1971). Dictionary of Statistical Terms. New York: Hafner Pub. Co. Modigliani, F. (n.d.). The Life Cycle Hypothesis of Saving, the Demand for Wealth and the Supply of Capital. Retrieved September 6, 2012, from Alda: http://www.alda.name/texty/Franco%20Modigliani%20%20The%20Life%20Cycle%20Hypothesis%20of%20Savings,%20the%20Demand%20for%20Wealth%20a nd%20the%20Supply%20of%20Capital%20-%201966.pdf Talukdar, D. (2011, July 28-30). 2011 China India Consumer Insights Conference: Day 2 Agenda. Retrieved September 6, 2012, from Yale School of Management: http://ciip.som.yale.edu/cci/sites/cci.som.yale.edu/files/1ATalukdar.pdf The World Bank. (n.d.). Retrieved December 14, 2012, from Philippines: http://databank.worldbank.org/ddp/editReport?REQUEST_SOURCE=search&CNO=2&country=PHL&seri es=&period= Zhu, C. (2011, November). Modern Economy. Retrieved December 14, 2012, from Scientific Research Open Access: http://www.scirp.org/journal/PaperInformation.aspx?PaperID=8699&JournalID=163

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