Shocks affecting electricity prices in Kenya, a fractional integration study

Abstract

We conduct a fractional integration and cointegration study of several Kenyan electricity price series in order to determine whether signs of persistence or mean reversion can eventually be discovered. Such features can be considered as relevant when considering the possibilities of shocks affecting the energy market of Kenya, which has recently been subjected to major debate. We conclude that electricity prices in Kenya contain unit roots, implying permanent shocks lasting forever. Among the factors affecting electricity prices, we find oil prices and interest rates have significant positive effects on electricity, and based on the fact that all the series are I(1), long run relationships are examined by means of fractional cointegration. The recently introduced FCVAR model is implemented, with results showing that the series under study are fractionally cointegrated, with oil price shocks affecting electricity prices.