15. Determination of Asymmetries and Market Integration in the Electricity and Crude Oil Markets

The aim of this thesis is to examine the asymmetric market behaviour in the supply-side and demand-side of the electricity market and the implications it has on government subsidy programme and electricity consumption/access. The study applied the nonlinear versions of the fully modified OLS, dynamic OLS and canonical cointegrating regression as a further robustness check. The study used annual data from 1976 to 2017. The results showed the integration of electricity and crude oil markets, with a significant long-run pass-through effect from crude oil price (i.e. input price) to the price of electricity (i.e. output price). There is a significant asymmetry in the response of electricity price to crude oil price changes, with suppliers of electricity absorbing more of lower crude oil price vis-a-vis higher crude oil price. This clearly shows that there exist market imperfections in the electricity sector. Lastly, consumers of electricity are more responsive to lower electricity price than higher electricity price. However, the existence of market imperfections could impede the government subsidy programme aimed at improving electricity access. Introducing competition and diversifying generating source in the sector to include renewable energy could prove very useful. In the short-term, however, subsidy programme aimed at improving electricity access can be effective if it targets the final price of electricity instead of the price of the critical input (i.e. oil).