criticize on the light of economic way : Electricity demand modeling in Saudi Arabia: Do regional differences matter? Jeyhun I. Mikayilova,b,*, Fakhri J. Hasanova,c, Waheed Olagunjud, Mohammad H. Al-Shehrie

A B S T R A C T The paper examines the electricity demand behavior for Saudi Arabia, using annual data for the period of 19902016, at regional level. The study finds that income, price and population are the main drivers of electricity demand at regional level. Although, the impacts vary across regions (central, eastern, southern and western), the estimated elasticities all are statistically significant, in both long and short run, and have the expected signs for all the regions. The income, price and population elasticities range from 0.10 to 0.93, from -0.63 to -0.06, and from 0.24 to 0.95, respectively, across regions in the long run. In the short run these intervals are (0.05, 0.47), (0.27, 0.01) and (0.13, 1.49) respectively for income, price and population across the regions. The findings reported in this paper, should assist policy makers to develop insights about the potential regional impact of changes to electricity prices, income and population patterns.

Introduction Since energy is a pervasive input to all business and recreational activities, total energy demand is an important indicator that helps explain the pattern of economic development within a country. Identifying and understanding the key determinants of electricity demand is therefore important for the economic prosperity of a country, since the availability of reliable electricity directly affects the prospects of sustainable economic development. With important mega projects already in the works and national transformation programs such as the National Industrial Development and Logistics Program (NIDLP, 2019) already being implemented, understanding the existing and projected behaviour of electricity demand is more important now than ever before. While it is relevant to conduct a study that investigates the determinants of aggregate electricity demand in KSA, this is a topic that has already been addressed by the existing literature to some extent (Atalla and Hunt, 2016, inter alia). However, aggregate level electricity demand has not been studied at regional level. Hence, there is a need for a research to investigate the aggregate level electricity demand accross regions. The objective of this research is to understand how determinants of the electricity consumption shape it over time in the Central, Eastern, Southern and Western regions of Saudi Arabia and suggest policy insights accordingly. Note that this 4-region classification is adopted by the Saudi Electricity Company (SEC) and sum of these four regions consumption add up to the total electricity consumption of the Kingdom. The following points motivated us to conduct electricity consumption analysis at the regional level. First, the regional dimension is important because of the differences in weather patterns (and subsequently the electricity demand profiles) across the country. Second, the distribution of residential, commercial, and industrial activities is different across the regions and this may imply different relationships between electricity consumption and its drivers. For example, in the eastern region the electricity consumption is mainly industry-driven whereas in western region, where we have the holy cities of Makkah and Madinah, this is mostly population/residential driven (SAMA, 2019). Third, the implementation of the mega projects mentioned above will also have implications for electricity demand at the regional level. Finally, recent analysis show that different regions react differently to the energy, of which electricity price reform, one of the key initiatives in the Fiscal Balance Program of the Saudi Vision 2030 (Alyamani et al., 2019).

A regional approach for KSA constitutes a novel and significant contribution to the literature on electricity demand in the following ways. First, to the best of our knowledge, there are very few to none studies that examine the determinants of electricity demand at the regional level for KSA. Alyamani et al. (2019) considered regional aspects of the electricity consumption. However, they only considered residential electricity consumption and did just a descriptive analysis. Diabi (1998) examined total electricity consumption for the five regions of Saudi Arabia over the period 19801992. However, he did a panel analysis and did not estimate region-specific parameters/elasticities, and hence is different from time series that we conduct in this research. Additionally, he did not address integration-cointegration and other properties of the data used such as cross-sectional dependency, which can lead a serious issue such as bias and inconsistencies and thus misleading policy recommendations. Second, it investigates the demand for electricity at a disaggregated regional level, which takes into account the region specific features of electricity demand behavior; Third, it takes into account the impact of demographic factors which may play a significant role in electricity demand formation; Fourth, it uses the more recent data, which partially enables us to see the impact of the ongoing energy price reforms and consequences of the low oil price environment on electricity demand. From a policy perspective, given the current transition from a heavily subsidized electricity price environment to a market-based price environment where subsidies are gradually phased out, it is important to consider the impact of this transition from a regional perspective. The findings reported in this study would help a better understanding of the regional impact (on electricity demand) of different price policy scenarios and changes in population and income. The findings will also be useful in determining which regions, and how much, to provide transitional support to in order to alleviate some of the financial hardships associated with rising electricity prices.1 This paper employs cointegration and equilibrium error correction (ECM) methodology to develop long- and short-run price, income and demographic elasticities for regional electricity demand. The study concludes that income, price and population are the main drivers of electricity demand at regional level as theoretically expected. Although, the impacts vary across regions, the estimated elasticities all are statistically significant, in both long and short run, and have the expected signs for all the regions. The income, price and population elasticities range from 0.10 to 0.93, from -0.63 to -0.06, and from 0.24 to 0.95, respectively, across regions in the long run. In the short run these intervals are (0.05, 0.47), (-0.27, -0.01) and (0.13, 1.49) respectively for income, price and population across the regions. The obtained Speed of Adjustment (SoA) coefficients are significant in all cases indicating the short-run deviations from the long-run relationship converge back to the equilibrium path. The rest of the paper is structured as follows; Section 2 reviews the literature on electricity demand modeling in the case of Saudi Arabia, Section 3 contains the theoretical framework and Section 4 briefly describes the methodology used, Section 5 presents the data. Estimation results are presented in Section 6. In Section 7, we discuss our key findings, while Section 8 concludes the study and provides the policy implications where we link our findings to the current policy environment.

Conclusions and policy implications In this study, we examined the impact of price, income and population (proxy for demographic effects) on electricity demand for four, central, eastern, southern and western, regions in Saudi Arabia. To the best of our knowledge, this is the first time series study to examine the determinants of regional electricity demand in Saudi Arabia. The empirical results show the estimates of the regional long-run price elasticities to be around 0.5 in three regions and 0.1 in the Southern region. This leads to the conclusion that changes in the price of electricity are an effective market signal that has the potential to impact the demand for electricity. From a policy perspective, based on the regional differences in elasticities, policy makers can develop insights about the potential regional impact of changes in electricity prices. Furthermore, based on the estimated regional impact, policy makers are better positioned to strike a balance between the desire to encourage efficient electricity consumption (by transitioning to a market-based pricing scheme with higher prices) and the negative impact of the price increase. Striking a balance will require policy makers to determine the appropriate level of household and industrial support required to dampen the negative impact of price changes. With long run elasticities that range between 0.24 and 0.95, the strong impact of population on regional electricity demand requires governments to pay special attention to policies that impact the total and regional distribution of population, which in turn affect the aggregate and regional distribution of electricity demand. This is especially relevant for the effective planning of generation, transmission and distribution networks across the country. The recently implemented expat levy is a relevant example of a policy that has the potential to change the existing population dynamics. Lastly, our results show that an increase (decrease) in income (gross domestic product and disposable income) leads to an increase (decrease) in electricity consumption. This result proves that electricity is a normal good from an income perspective. It is important to note that there are big differences in the income elasticities across regions. The differences range from approximately 0.7 in the COA to 0.2 in the EOA. This implies that it is important to account for the regional income differences when designing policy for the electricity sector. In summary, our findings constitute evidence on the characteristics of the regional determinants of electricity demand in Saudi Arabia. The policy implications discussed above represent our contribution to the discussion in the current policy environment in Saudi Arabia. There is a room for future research to analyze the regional electricity demand based on types of consumers. This would enable policymakers to see the main types by regions driving the demand for electricity and clearer picture of demand behavior. Author contributions All authors contributed equally to all aspects of the research reported in this paper. Declaration of Competing Interest The authors declare that they have no known competing financial interests or personal relationships that could have appeared to influence the work reported in this paper. Acknowledgments The views expressed in this study are those of the authors and do not necessarily represent the views of their affiliated institutions. We are responsible for all error and omissions.