Determinants of renewable energy consumption in Nigeria: The role of economic policy uncertainty

Abstract

This study delves into the complexities surrounding renewable energy consumption (REC) in Nigeria, specifically focusing on the impact of economic policy uncertainty (EPU) from 1980 to 2022. Employing the Autoregressive Distributed Lag (ARDL Model), the study analyzes the influence of four key factors: EPU, Gross Domestic Product (GDP), Foreign Direct Investment (FDI), and trade openness (OPN). The data on the variables was obtained from World Bank World Development Indicators (WDI), Energy Information Administration (EIA) and Central Bank of Nigeria (CBN). While no long-run cointegration emerges among the variables, the ARDL short-run analysis reveals statistically significant relationships. A negative association exists between the first lag of REC and its current value, indicating a feedback effect where higher past renewable energy consumption leads to lower current consumption. Additionally, at the 10% significance level, EPU exhibits a negative influence on REC, suggesting that increased policy uncertainty discourages renewable energy consumption. Conversely, at the 10% and 1% significance levels respectively, GDP, FDI, and OPN all demonstrate positive impacts on REC, highlighting the roles of economic growth, foreign investment, and openness in promoting renewable energy consumption. Based on these findings, the study recommends policymakers promote stable and predictable economic policies to incentivize renewable energy investments. The government should leverage economic growth for clean energy transition (that is) to channel growth towards renewable energy infrastructure development and research. The government should also foster an attractive environment for foreign direct investment (that is) to streamlining regulations and offer incentives to attract capital for renewable projects. Lastly, the government should promote economic openness and knowledge transfer through international collaborations to facilitate technology diffusion and knowledge sharing in renewable energy. By implementing these recommendations, Nigeria can accelerate its transition towards a sustainable energy future, reaping environmental benefits and fostering economic diversification and technological advancement.