Electricity Demand Analysis Using Cointegration and Error-Correction Models with Time Varying Parameters: The Mexican Case

Abstract

We specify and estimate a double-log functional form of the demand equation, using monthly Mexican electricity data for residential, commercial and industrial sectors. Income, prices and a nonparametric temperature measure are used as explanatory variables, and the income elasticity is allowed to evolve slowly over time by employing the time varying coefficient (TVC) cointegrating model. The specification of the proposed TVC cointegrating model is justified by testing it against the spurious regression and the usual fixed coefficient (FC) cointegration regression. The estimated coefficients suggest that the income elasticity has followed a predominantly increasing path for all sectors during the entire sample period, and that electricity prices do not significantly affect in the long-run the residential and commercial demand for electricity in Mexico.