Electricity demand at turning point

This is the second of a set of three notes on the electricity sector. In the first note (find it here), we compared electricity demand over the last 10 years in OECD countries and emerging markets and highlighted the divergent demand trends in electricity demand in OECD and emerging countries. Electricity demand was flat in OECD over the past 10 years but it rose by around 25% in emerging economies over the same period. There are two main reasons for the divergence: efficiency gains in OECD countries and the transfer of heavy industries to emerging economies. In this note we look at future electricity demand prospects and compare the assumptions embedded in two well-known net zero scenario’s: by the NGFS and the IEA.

Demand for electricity to expand by decarbonization and energy security

Electricity sector reform is pivotal for decarbonization. As discussed below, through the IEA and NGFS scenarios, this means, amongst others, an increase in electricity demand and a switch in the underlying sources used to produce it. The EU, for instance, set a goal of reducing GHG emissions by 55% by 2030 in its Fit for 55 package. Not only governments set goals for GHG emission reduction, but also large companies made high-profile pledges to limit their impact on the environment.

In addition to that and in the face of potential deglobalization, energy security has also become a priority in many regions. For the EU this momentum is amplified by the recent energy crisis, leading to the new REPowerEU plan which supports the block’s overall clean energy transition and simultaneously reducing its energy import dependence (to switch away from Russian gas, for instance). The new initiative not only targets the gas sector, it also aims to transform the electricity sector – via accelerated roll-out of renewable energies, electrification of end uses and renewable hydrogen. The electrification of end uses will result in higher demand for de-carbonized electricity (read our publication here).

Although the current energy crisis has stressed the importance of energy security, there are limits to direct electrification in the short term, especially for some industries such as long-distance transport, including aviation and shipping. These barriers could be overcome by suitable technologies that are under development. Thus, although the energy crisis has not enabled a sudden switch to fossil fuel-free alternative energy sources, it has set in motion a number of medium to longer term shifts that will accelerate the transition (see our publication here). When these physical limitations are overcome, the sectors that are reducing their dependence on fossil fuels will spark an increase in electricity demand.

The electrification of sectors such as transport will raise electricity demand but energy demand will be moderated by energy efficiency gains that will be driven by new and improved technology. A good example of energy efficiency is the response of European manufacturers to the recent gas crisis. Industrial output has proven remarkably resilient in spite of a large reduction in gas supply, but going forward, similar gains in energy efficiency cannot be expected. In other words, there are (short term) limits to energy efficiency gains. All in all, going forward, we expect the increased demand from electrification to outweigh the reduction in electricity demand from efficiency, resulting in higher overall electricity demand.

Net-zero by 2050 scenario’s to quantify electricity demand increases

In this section we discuss the implications and assumptions for electricity demand that are embedded in two well-known net-zero by 2050 emissions (NZE) scenarios, which are designed to model how the world can achieve net-zero energy-related and industrial process CO2 emissions by 2050. The scenarios require substantial emissions reductions by 2030 to be in line with the Paris stretched target of 1.5°C scenario’s (as defined by the IEA).

Electricity demand is set to rise sharply in both scenarios. In the figures below we have visualized the electricity use for various sectors. All denote final electricity use, except hydrogen supply which is a secondary source. As visualized in the graphs, electricity used in hydrogen production differs significantly between the two scenarios; the assumptions for hydrogen supply are provided in the table below. The main implication is that the IEA assumes almost all hydrogen production to be low-carbon and expect almost double the yearly production capacity for hydrogen than the NGFS does.

To illustrate the methodological differences and assumptions of the scenarios, we contrast these in the table below.

Electricity demand will rise in all scenarios

Since the NZE scenarios are ambitious pathways, in this section we illustrate that worldwide electricity demand will also rise in the other scenarios that the NGFS has set out in their third phase scenarios. Electricity demand will rise significantly in all scenarios as shown in the figure below. The data represents the sum of final electricity demand and electricity use in hydrogen production (which is a secondary step).

This illustrates that even in the scenario with the lowest ambition (i.e. the current policy scenario), electricity demand rises from 21,503 TWh in 2020 to 48,927 TWh in 2050. The divergent net zero, which is the scenario with the highest ambition, shows a rise of electricity demand to 61,488 TWh in 2050. Note that this is still less global electricity demand than the IEA set out in their NZE scenario.

Greening of electricity generation and obstacles to electrification

As we have set out above, electricity demand will grow under all scenarios. This marks a shift from the past 10 years in the OECD where electricity demand was flat. For the electrification process to decrease the CO2 emission intensity, the sources used in electricity generation need to be de-carbonised alongside switching from fossil fuel use to electricity. The IEA, for instance, expects the two major sources in 2050 to be solar PV (33%) and wind (35%). To enable this transition, large investments in the energy sector are needed. According to the assumptions in the IEA Net-Zero scenario, annual investment will rise to 5 trillion USD in 2030 and to 4.5 trillion USD by 2050. The NGFS Net-Zero scenario assumes investment in the energy sector to be 3.4 trillion US$2010/yr for 2030 and 2.4 trillion US$2010/yr for 2050.

This decarbonization of electricity production in combination with the growing electricity demand will lead to intermittency problems. These problems and their solutions will be discussed in the third and final part of our three-piece publication on electricity.

* NDCs denotes Nationally Determined Contributions

This article is part of the SustainaWeekly of 30 January 2023