BUS606: Operations and Supply Chain Management

On average, global growth in demand for electricity has been slowing since 1970

"Electricity demand has grown faster than GDP for GDP growth rates up to 5 percent and slower than GDP for GDP growth rates above 5 percent"

Electricity demand is influenced by aggregate demand, changes in energy intensity, and shifting input prices. Aggregate demand is affected, among other factors, by economic and demographic growth, and access to electric power. Energy intensity changes with industrialization or deindustrialization – and with any consequent shift in the composition of industries. It also changes when technological progress affects energy efficiency. Shifting prices for inputs used to produce electricity, or for intermediate products that are substitutes for (or complements to) electricity, also affect electricity demand.

GDP or other measures of economic output are often the strongest correlates of electricity demand. Since GDP forecasts are available for a range of developing countries, they are often used to forecast electricity demand. Figure 1 shows global demand and real GDP growth rates from 1970 to 2012, based on an unweighted average across countries. Two points are noteworthy. First, in both the industrialized countries of the Organisation for Economic Co-operation and Development (OECD) and in non-OECD countries, long-term growth in demand for electricity is trending downward. Second, for the non-OECD countries, there has been a marked convergence between electricity demand growth rates and GDP growth rates over this time period; whereas throughout the 1970s and until the mid-1980s rates of growth of demand for electricity far exceeded real GDP growth rates, the two came closer together since the mid-1990s.

Figure 1. Electricity demand and real GDP growth rates over time in OECD countries, 1970–2012

a. OECD countries

b. Non-OECD countries

Figure 2. Real GDP growth rates against electricity-demand growth rates, 1990–2012

Nevertheless, individual countries show significant variation in rates of growth in demand for electricity around their respective GDP growth rates. Figure 2 plots real GDP growth rates, rounded to the nearest percentage point, against the electricity-demand growth rates for the period since 1990. The relationship between electricity-demand growth and GDP growth does not lie on a 45-degree line, meaning that the two – though correlated – are not typically equal in value. In fact, electricity demand has grown faster than GDP for GDP growth rates up to 5.0 percent and slower than GDP for GDP growth rates above 5.0 percent. There is considerable variation across countries, however, with half the countries falling within four percentage points of this mean (table 1)

Table 1. Real GDP growth rates against electricity-demand growth rates: Linear fit (in percentages)

"Growth in electricity demand has been systematically higher in Africa, Asia, and the Middle East, and among countries having lower income, smaller power systems, and lower access rates – as well as for oil exporting countries".

Though much of the variation in historic growth in energy demand can be attributed to differences in real GDP growth rates, other factors play a role. Figure 3 plots the average electricity output and real GDP growth rates since 1990 across country regions, income categories, electric system capacity, access rate, and oil-export orientation. Growth in electricity demand has been systematically higher in Africa, Asia, and the Middle East, and among countries having lower income, smaller power systems, and lower access rates – as well as for oil exporting countries. On average, countries in groups with high electricity-demand growth also had high real GDP growth. Where this pattern breaks down, other factors are at play. For example, low-income countries experienced high electricity-demand growth while showing relatively low growth in real GDP. Economic transformation – characterized by intensifying production and greater access rates, among other factors – changes growth rates for electricity demand beyond growth arising from output shifts alone.

Figure 3. Average electricity demand growth rate across different country groups, 1990–2012 (percent)

Table 2. Accuracy of best performing time-series forecasting models vis-à-vis ad hoc forecasting methods (benchmark models)

"When good data are available, practitioners can employ econometric methods to deliver accurate forecasts of demand".