ENERGY PRICES AND HOUSEHOLD’S CONSUMPTION CHOICES OR PATTERN USING LAGOS STATE AS CASE STUDY

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF STUDY

The importance of energy in human life cannot be overemphasized; it is central to all aspects of economic growth, progress, and development as well as poverty eradication and security (Akinola, et al., 2017). Energy plays a critical role in enhancing production, competitiveness, and incomes through its support to productive activities and the facilitation of investments in industry, commerce, and agriculture (World Bank, 2007). Energy sources ranges from the traditional biomass (fuel wood and charcoal) to modern fuel types like Liquefied Petroleum Gas(LPG). Biomass is the most common source of energy in developing countries. However, the use of biomass is associated with many implications to the environment, as the burning of biomass releases harmful pollutants into the atmosphere, leading to serious health issues. Furthermore, access to modern energy is essential for the economic growth of countries, especially for developing nations. Modern energy sources are more energy efficient and less polluting than traditional sources. The use of modern energy sources can also help reduce energy costs and lower the burden on households.

The pattern of energy usage in Nigeria’s economy can be divided into industrial, transport, commercial, agricultural, and household sectors (Emagbetere, Odia &Oreko, 2016). Household cooking in Nigeria is largely reliant on burning biomass for energy. This sector accounts for the lion’s share of energy consumption, with approximately 80% of total energy being used for this purpose. Most of this energy comes from fuel wood, amounting to a staggering 90% of the total (International Energy Agency, 2015). Animal dung is used by most of the world’s population, especially in rural areas, for the cooking and heating purposes. Plant residues, such as crop wastes and woody biomass, are also used in a few regions of the world, Fuelwood is the most widely used energy source in developing countries for cooking and heating. In urban areas, kerosene, gas, and electricity are used for cooking and heating (Borisade et al., 2020). For the purpose of lightening, the various choices mainly include; electricity or solar, petroleum or diesel (used for fueling generators), kerosene, candles and traditional lamps as well as firewood, mostly based on the social-economic status of the household (Barness & Floors, 1996). In addition, for the purpose of space heating and cooling (also drinks cooling), the various energy sources available consists of mainly electricity, petroleum, or diesel power generator. Lastly, for transportation purposes the major energy choices available are; petroleum and diesel for fueling various transport vehicles. The fact that a household chooses one or more of these energy sources is a function of interaction of so many factors which consists of socio-economic, demographic characteristics of households, climate conditions, house, product or vehicle characteristics, attitudinal variables as well as environmental factors.

According to Adetayo et al. (2021),energy option of any country is influenced by national economic condition, individual level of income, technology advancements, the state of energy infrastructure as well as the rate of population growth. The Nigeria energy sector is not well developed, this is largely due to the inadequate infrastructure and investment in the sector. Furthermore, the sector has been marred by corruption and mismanagement, leading to poor energy security and inefficient energy production. As aresult, electricity supply remains unreliable and access to energy is limited in most parts of the country. Energy consumption patterns in the world today shows that Nigeria and indeed African countries have the lowest rates of consumption. Nevertheless, Nigeria suffers from an inadequate supply of usable energy due to the rapidly increasing demand, which is typical of a developing economy. This has resulted in energy poverty, a situation where households cannot access energy services, they need for basic activities such as cooking, lighting, and running electronic appliances. In addition, the lack of access to electricity has hindered the development of small businesses, leading to a further decrease in economic and social development. On the contrary, the country is potentially endowed with sustainable energy resources. Nigeria is rich in conventional energy resources, which include oil, natural gas, lignite, and coal. It is also well endowed with renewable energy sources such as wood, solar, hydropower, and wind (Okafor &Uzuegbu, 2010).

The Nigeria Enterprise Survey from the World Bank showed that 27% of Nigeria firms identified reliability of electricity supply as the main obstacle to their business. On average, 32.8 power outages were reported to occur in a typical month leading to an estimated 11% loss in sale (World Bank, 2015). The average grid-connected household receives just 6.6 hours of supply on a typical day, linked to a per capita consumption of just 144kWh per year. Plagued by issues of supply quality, many Nigerians have resorted to self-generation using petrol and diesel generators, spending approximately 1.56 trillion Naira (3.76 billion USD, using an average exchange rate in 2021) per year on fuel (Pelz, et al., 2023). Kerosene, mostly consumed by the poor is the costliest in Nigeria when compared with other energy types.As of 1st of October 2023 this situation has compelled the poor to opt for biomass energy despite the health hazards they constitute (Ang’u, 2023).

The role of energy in households is of utmost importance, and yet there has been a relative lack of empirical research on energy prices and household consumption for cooking, taking into account different types of households in rural and urban areas. Therefore, this study aims to evaluate the choice of household cooking fuel in all areas of Lagos state.

1.2 STATEMENT OF PROBLEM

 According to the World Bank (2023), only 31% of households in Nigeria are connected to the grid, and those who are connected experience frequent power outages and voltage fluctuations. As a result, many households’ resorts to alternative energy sources, such as generators, kerosene, firewood, and charcoal, which are often costly, inefficient, and harmful to the environment and health. Rising energy prices have a significant impact on household consumption choices(Zhang, Teng, & Zhou, 2020). As energy prices increase, households are forced to make difficult decisions about how to allocate their limited resources. They may be forced to reduce spending on other essential items such as food, clothing, and healthcare in order to pay for their energy needs. Additionally, households may be more likely to use less energy efficient appliances and methods of heating and cooling their homes in order to save money. This results in increased energy consumption, resulting in further financial strain on households and a greater negative impact on the environment.

The amount of fuelwood harvested daily in Nigeria to support its energy needs is indicative of the exploitative and disruptive environmental stress caused by the country’s energy consumption pattern and level(Jatau, 2011). The rate at which the vegetation has been exploited to meet the exponential human demand for energy has become highly disruptive to the ecological system ( Adeokun et al.,2003).

It was estimated that roughly 2.5 billion individuals in less economically developed nations depend on biomass fuels to satisfy their cooking requirements. For many of these countries, more than 90% of total household fuel is biomass. Without new policies, the number of people that rely on biomass fuels was expected to increase to 2.6 billion by 2015, and 2.7 million by 2030 (about one-third of the world’s population) due to population growth (IEA, 2004).

According to the Summary of The Lagos State Electricity Policy, a long-term load forecast prepared by the Lagos State Government with support from the Power Africa Nigeria Power Sector Program (NPSP) in February 2021 (‘‘Load Forecast’’) estimates that 31% of households in Lagos were grid connected as of 2020 based on the total number of registered customers, similar to the 32% estimate by the World Bank. The load forecast also assumes that the highest number of registered customers in Lagos as of 2019 are residential customers (1,294,448) compared to commercial customers (341,582) and industrial class customers (6,323) (Olabode, Okakwu, & Amuda, 2019).

There is a high population of unserved and underserved customers (residential, industrial, and commercial) who are either off-grid or utilizing self-owed electricity generators, kerosene lamps and other fossil-based energy sources. For example, Ibeju Lekki LGA has several communities that have remained un-electrified for 6-16 years. It would take on estimate about twenty (20) years for unserved households to be connected to the grid based on current estimates and State’s grid electrification rate.

1.3 OBJECTIVES OF THE STUDY

The main objective of the study is to analyze and assess determinants of household energy choice and consumption in Lagos state, Nigeria. The main objectives are:

1. To investigate the extent to which rise in energy prices affect the household energy consumption choices.
2. To examine the relationship between rising energy prices and the shift in household consumption choices towards renewable energy source.
3. To assess the impact of socioeconomic factors on the response of households to changes in energy prices fluctuation.
4. To analyze the effectiveness of government policies and incentives on households energy choices during periods of elevated energy prices.

1.4 RESEARCH QUESTIONS

Due to the issues raised, the following are some of the questions answered by the study.

i. What is the impact of rise in energy prices on household overall energy consumption choices?

ii. What is the impact of increase in energy price and the shift in household consumption choices towards renewable energy sources?

iii. How do socioeconomic factors influence the way households respond to changes in energy price fluctuation and their energy consumption choices?

iv. What role do government policies and incentives play in shaping household’s energy consumption pattern during periods of elevated energy prices?

1.5 RESEARCH HYPOTHESIS

The following hypotheses were developed based on the study’s objectives. The study’s hypothesis contains the null hypothesis (H0) and the alternative hypothesis (H), listed as follows;

Hypothesis 1

H0: Rise in energy prices has no significant impact on households overall energy consumption or energy pattern.

Hypothesis 2

H0: Increased energy prices has no significant impact on higher likelihood of households prioritizing renewable energy sources, leading to a shift in their energy consumption choices.

Hypothesis 3

H0: Socioeconomic factors has no significant impact on energy price fluctuations on household consumption choices.

Hypothesis 4

H0: Government policies and incentives has no significant impact on household consumption choices, especially during periods of elevated energy prices.

1.6 SCOPE OF THE STUDY

This study was carried out in Lagos State Nigeria. Lagos state which is the commercial and economic centre of Nigeria, hosting 60% of industrial activities in the country and contributing about 30% of total national GDP and 50% of non-oil GDP. Lagos State is also the largest city (by population) in Nigeria (estimated population of 27.3million in 2022) and considered one of the largest urban agglomerations in the world (Statista 2022). In spite of this, the state is allocated less than 25% of grid connected electricity which is grossly inadequate for its increasing population and economic activities. This study project is intended to span a very lengthy time span of (1996- 2023). This study also talks about how Lagos is dependent on fragmented off-grid electricity supply primarily from an estimated fleet of about 15,000MW of backup generator capacity fueled by expensive and heavily polluting distillates like fuel, oil, petrol, and diesel. Cooking accounts for a staggering 91% of household energy consumption (ECN 2005). The types of energy use for cooking covered in the study include; liquefied petroleum gas (LPG), fuel wood, charcoal, electricity, and kerosene.

The research included households with low-, middle- and high-income households living in Lagos state Nigeria. The researcher is making use of primary data along the cause of this study.

1.7 SIGNIFICANCE OF STUDY

This study aims to examine energy consumption in households within Lagos state, providing insights into real-world dynamics. The acquired knowledge can be applied by the Nigerian government, in collaboration with international and non-governmental organizations, to formulate policies and plan for energy, contributing to the reduction of solid fuel consumption, environmental protection, improved quality of life, and overall development.

The study will explore other factors that contribute to the consumption of energy by the residential sector in Lagos State Nigeria. The survey investigated the choice of energy for households and the ways of consumption plus collection of additional data which helped fill the gap in the country. More so, the study helped in understanding the main determinants of energy across the urban and rural areas as this will contribute to assisting the formation of relevant energy policies by the government designed in a direction to improve household energy security.

This work will also open a new avenue for research and will add to the existing body of literature.

1.8 DEFINITION OF TERMS

Energy prices: Refers to the monetary value assigned to various forms of energy commodities, such as electricity, gas, or fuel, as determined by market mechanisms, government regulations, or other influencing factors.

Household Consumption Choices: This encompasses the decisions made by individuals or families regarding the utilization of energy resources within their homes. This includes preferences for specific energy sources, energy-efficient practices, and the overall management of energy consumption.

Biomass: This is the total mass of living material provided by a given environment or ecosystem in a given time. Examples of biomass used for the production of energy include wood, food crops, and animal waste.

Fuelwood: This is a traditional source of energy for domestic and commercial use. It is derived from cutting and burning wood materials such as logs and twigs.

Grid: The electrical grid is the intricate system designed to provide electricity all the way from its generation to the customers that use it for their daily activities.