Electricity demand: Why has it been flat?
Electricity demand has been flat in OECD countries despite GDP growth and new sources of demand. By contrast, demand has been rising in emerging economies. Several factors explain the divergence. These include, structural changes with advanced economies turning away from heavy industries, increased energy efficiency and catch-up in the adoption and use of electrical appliances in emerging economies.
This is the first of a series of three notes on electricity demand. The electricity sector must decarbonise because it contributes around 1/3 of global CO2 emissions. The sector must also expand because other sectors such as buildings, transport and industry that will replace fossil fuels with green electricity as part of their transition.
In this note we shine a light on divergent trends in electricity demand between OECD economies, including Netherlands and emerging economies. Electricity demand has been flat in OECD countries since 2010 in spite of GDP growth and new demand from digitalisation and the transport sector. By contrast, demand has been rising in emerging economies over the same period.
Several factors explain the divergence. These include, structural changes with advanced economies turning away from heavy industries, increased energy efficiency and catch-up in the adoption and use of electrical appliances in emerging economies.
The electricity sector sits at the heart of a decarbonised economy. The power sector is one of the most carbon intensive sectors, accounting for around a-third of total global CO2 emissions. Here in the Netherlands, around 20% of CO2 emissions are attributable to the power sector. At the global level, some 60% of electricity is generated from fossil fuels. The power sector will have to fully decarbonise to achieve net zero.
Electricity is also at the centre of de-carbonisation plans of many other sectors. Think of transport, where electric vehicles are gradually replacing internal combustion engines or a heat pump powered by green electricity that replaces a fossil fuel boiler. Nowadays, electricity accounts for about 20% of the world’s total final consumption of energy according to the IEA’s . The abatement plans of many industries that rely on fossil fuels involves a switch to zero carbon electricity. This switch is widely expected to result in a substantial increase in electricity demand and that in turn, will require large investments. McKinsey, the management consultancy firm, estimates an average annual investment of USD 1 trillion in power generation, USD 820 billion in the power grid and USD120 billion in storage from 2021-2050 to achieve net zero by 2050.
This is the first of a three-part series of notes that we will publish on the electricity sector. In this note, we will focus on recent trends in electricity demand. The two main points are:
Electricity demand has been surprisingly flat in OECD economies, including the Netherlands, for the past 12 years even though the economy is substantially larger. This stands in contrast to emerging economies, where electricity demand continues to expand.
A combination of increased energy efficiency and a pivot away from energy intensive production explains this divergence between OECD and emerging economies.
Our next publication on this topic will be more forward looking. In our view, electricity demand in advanced economies is at a turning point as households and businesses switch away from fossil fuels and towards electricity over the next decade.
This increase in demand is not without challenges. With an increase in electricity demand and the transition towards renewable energy sources at the same time we are facing an ‘energy mismatch’ between demand and supply. This is the topic for our third publication in this series.
Divergent trends
Global electricity demand has expanded by around 25% since 2010, see the figure below. The global economy has also expanded by a similar amount over the same period. Together this implies that electricity consumption per unit of GDP has been flat at the global level since 2010.
The story is somewhat different among OECD countries, including the Netherlands. Electricity consumption was flat over this period even though GDP expanded by 10%. As a result, electricity consumption per unit of GDP fell by around 10% in these economies.
We also observe a divergence when comparing electricity consumption per head. Consumption per head has increased by 10% globally but has notably fallen by around 5% in the OECD/Netherlands over this period.
There are several factors that explain the divergent trends.
To start with, it is worth emphasising that per head electricity consumption remains significantly higher in advanced economies despite the recent reduction and that is, for example, because most households in OECD have access to electricity supply and already owned multiple electric appliances like washing machines, refrigerators, computers and televisions. That is not the case in emerging markets. Consequently, there is more catch-up electricity demand compared to advanced economies. All this is not to say that there were no new sources of electricity demand growth in advanced economies. There are, for example, electrification of cars and increased digitalisation, but so far, the electricity demand from these sources is still relatively small. For example, in 2021 market share of electric cars is still only about 8%.
Moreover, the structure of the economies has changed with advanced economies becoming less reliant on heavy industries such as steel and aluminium production. In fact, advanced economy share of steel and aluminium production has less than halved since 2000 and the migration of these heavy industries to emerging economies has contributed to the higher electricity intensity there.
Another important contributing factor is energy efficiency. This includes new and more stringent standards for electric motors, refrigeration, and lighting. To be sure, many of these efficiency standards have also been adopted in emerging economies, but the speed of adoption and the penetration is likely to be lower. The IEA estimates that annual advanced economy electricity demand would have been around 1.5% per year higher since 2010.
Conclusion
The path to net zero requires an expansion in electricity demand and a complete de-carbonisation of the power production process. Looking back at the past 12 years, electricity demand has been surprisingly flat in OECD economies even though the economy is larger. Economic growth has resulted in higher demand in advanced economies, as has the shift towards digitalisation and electric cars, but this new demand has been fully offset by energy efficiency gains. There is a limit to efficiency gains and going forward, we expect demand for green electricity to expand over the next two decades. This growing demand in combination with the decarbonisation of power production will lead to intermittency problems. In the next two reports we will discuss this further.