BUS606: Operations and Supply Chain Management

Accurate forecasts of electricity demand inform investment decisions about power generation and supporting network infrastructure

Of major interest to energy policymakers, power utilities, and private investors alike, forecasts are also essential for development professionals. Inaccurate forecasts, whether they over- or under predict demand, can have dire social and economic consequences. Underestimating demand results in supply shortages and forced power outages, with serious consequences for productivity and economic growth. Overestimating demand can lead to overinvestment in generation capacity, possible financial distress, and, ultimately, higher electricity prices.

Despite their central role in economic analyses of the power sector, demand forecasts are sometimes opaque. Demand forecasts are critical in the design of least-cost generation plans for the power sector, as well as in investment appraisals of individual power-generation projects. Nevertheless, demand forecasting often receives less technical attention than other components of the power sector analysis; the basis for forecasting can also sometimes be obscure. Given the paucity of data and the methodological challenges, demand forecasts are sometimes derived from simple heuristics: for example, using GDP-based demand-growth forecasts as proxies for the growth in demand for electricity (sometimes with an adjustment factor). Moreover, demand forecasting may be subject to optimism bias, which can be driven by the political economy or the engineering culture surrounding large investment projects. Demand forecasting can be particularly challenging in developing countries, where data is often elusive, political influences are often brought to bear, and historic electricity demand itself is more volatile owing to instability, whether macroeconomic or political.

This Live Wire provides practitioners with a quick reference to historical trends for electricity demand in the developing world and to new econometric forecasts at the country level. By providing a succinct overview, it allows the patterns and interrelationships of economic growth (and other relevant drivers) to come into focus. The note also reviews demand-forecasting methodologies and discusses their applicability in different contexts.

The table at the end of the note provides historic data on growth in electricity demand as well as customized 5- and 10-year projections for 106 developing countries.

Source: Jevgenijs Steinbuks Joeri de Wit, Artur Kochnakyan, and Vivien Foster, https://openknowledge.worldbank.org/handle/10986/26189
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