FORECASTING MODEL FOR

THE ELECTRICITY SECTOR

A FINANCIAL MANAGEMENT RESEARCH
SCHOOL OF ACCOUNTANCY AND BUSINESS MANAGEMENT
SAINT LOUIS UNIVERSITY

MAY 2018
 WHAT IS FORECASTING?

Forecasting is the technique of using the

historical data to predict the future, but it is difficult for
businesses to do. As to it, time series forecasting will
be used as part of the quantitative analysis. Time
series forecasting is the natural ordering of the data
points and it is used in finance, sales, operation, etc.
Moving Average and Autoregressive Moving Average
are commonly used in times series forecasting.
 WHY ELECTRICITY CONSUMPTION?
Electricity is an essential input for all industries and is a necessity for
every consumer who use electricity. The Philippine economy together with
supply and demand of energy continues to boom. The energy consumption
level of the Philippines is one of the lowest total energy consumed by Asia and
Oceania.

We chose to forecast the electricity sector to determine the main

reasons as to why the Philippines is one of the lowest in terms of its
consumption, making it less developed compared to other Asian countries.
Thus providing recommendations to improve our international standing.
 PROGRAMING
R is an open source programming language and software
environment for statistical computing and graphics that is supported by
the R Foundation for Statistical Computing.

This software has thousands of arguments and commands that

are user-friendly and is very helpful in the completion of this study.
 BOX JENKINS METHODOLOGY
The Box Jenkins
Methodology framework
provides us the step by step
process as to how we can
forecast the Electricity
Sector of the Philippines.
 STEP 1:DATA COLLECTION
The data used in this study were the
series of quarterly electricity consumption
of the Philippines in millions of pesos, from
January 2000 to December 2017. The data
were collected from Philippine Statistics
Authority (PSA) .
 Qtr1
TRAINING SET
Qtr2 Qtr3 Qtr4
DATA PARTITIONS
TESTING SET
2000 24,621 28,324 29,482 27,159 Qtr1 Qtr2 Qtr3 Qtr4

2001 30,391 36,539 36,925 30,719 2012 75,896 93,300 72,129 65,549

2002 35,136 39,014 32,256 32,208 2013 78,148 103,999 75,266 59,029

2003 36,094 40,642 35,343 33,575 2014 83,832 108,429 78,501 76,877

2004 38,145 41,828 39,066 40,972 2015 87,350 112,880 78,285 77,223

2005 44,492 48,846 43,659 42,202 2016 91,267 118,138 83,029 81,371

2006 46,828 54,585 49,141 45,111

2017 96,130 126,238 89,024 91,843
2007 50,801 60,980 52,156 46,609

2008 53,087 64,151 51,882 46,236

2009 51,282 68,064 53,448 47,299

2010 63,547 83,087 62,220 56,446

2011 64,848 53,662 63,544 58,542

 The data are divided into two subsets: a training set January 2000-
December 2011 and the test set January 2012- December 2017. The training
subset is used to estimate the parameters and the second data set was not
used for estimation, but was used for comparing different models.

Training Set – dataset used to train a “model”

In-sample – forecasted values less actual data of the training set
Testing Set – dataset used to test the “model” trained
Out-sample – forecasted values less actual data of the testing set
Mean Absolute Error – absolute value of the difference between the
forecasted value and the actual value.
 STEP 2: DETERMINING THE
STATIONARY OF TIME SERIES
The series should be stationary so it will be useful as descriptors of
future behavior. Its statistical properties such as mean, variance,
autocorrelation, etc. are all constant overtime. In order to focus on the
analysis regarding the fluctuations of the data on the trends, the data
of for the Electricity consumption must first be detrended and with the
aid of the Augmented Dickey-Fuller Test (ADF), the p-value of 0.9289
shows that the data is stationary after the first differencing.
CORRELOGRAM OF AGRICULTURAL
SECTOR AFTER 1ST DIFFERENCING
Differencing
makes the
data
stationary
and ready
for the next
step which is
the model
identification
and
estimation.
 STEP 3: MODEL IDENTIFICATION
AND ESTIMATION
Model Identification and Estimation – The forecasting model (2, 1, 5) (0,
2, 5) was identified based on the plotted time series of Autocorrelation
Function (ACF) and Partial Autocorrelation Function (PACF) starting with the
prevalent spikes and consider its seasonality.
PACF – tool for model identification and estimation, functions to confirm
the presence of an Autoregressive process
ACF – also a tool for model identification and estimation and functions
to illustrate Moving Average
SARIMA – Seasonal Autoregressive Integrated Moving Average
PLOTS OF PACF AND ACF
The prevalent
spikes exceed
the confidence
bands and
indicates the
presence of
seasonality and
non-normality
of the data. The
spikes also
provide clues
for model
identification
and estimation.
 STEP 4: DIAGNOSTIC CHECKING
After the Model Identification and Estimation, the White Noise Test
(Gaussian White Noise) of the data must be checked.
White Noise needs Identical Independent Distribution (IID) to be
normal. This means that the data has the same parameters of
distribution. The Shapiro-Wilks Test with the p-value of 0.4596 shows that
there is normal distribution with the model derived.
4-PLOT -> GAUSSIAN WHITE NOISE
Upper left – difference of
observed and actual
data (residuals)
Upper right –
Independence Structure
Lower left – Histogram
with slight bell shaped
curve
Lower right – Quantile-
Quantile Plot illustrating
normality of data
NEW PLOTS OF PACF AND ACF
The dominant
spikes of both
PACF and ACF
are within the
confidence
bands. The
correlograms
are indicative
of
independence
of the residual
data from the
model.
STEP 5: FORECASTING AND
FORECAST EVALUATION
FORECASTED DATA USING SARIMA
MODEL

Using the SARIMA model (0,0,1) (0,1,1) , we came

up with the forecasts for years 2018 – 2022.
ACTUAL DATA FITTED WITH
FORECASTS
The Mean
Absolute Error
(MAE) explains
that there is no
over-fitting, which
means that the
out-sample error is
greater than the
in-sample error
and this indicates
that the model
learned from the
training set.
RECOMMENDATION
 SPECIAL THANKS TO
Mr. Ren Lionel Marcaida – Consultant
Philippine Statistics Authority (PSA)
R Studio Programming
Session Hub (Session Delight)

And to all we have failed to mention who have helped us in the preparation
and completion of this study, our sincerest gratitude is extended to all of you.
 THE RESEARCHERS
S1 - Vincent Wyeth B. Decipeda
S2 - John Daryll M. Enrico
S3 - Ralf Joseph N. Esposo
S4 - Theodore M. Gonzalo Jr.
S5 - Albert John A. Parayno
S6 - Christian A. Piggangay
S7 - Alejandro G. Recile Jr.
S8 - Teody D. Sarmiento
S9 - Gerald D. Segundo
S10 - June Marlowe A. Soria
Promoter - Imelda P. Degay