Changes in consumption of electricity

The Impact of Climate Change on Electricity Demand: Developing vs. Developed Countries

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27 August 2013

Introduction

This analysis will focus on the potential impact of climate change on electricity demand, i.e. the relationship between the behaviour of electricity consumption and temperature, with a focus on some OECD and non OECD countries. Factors such as geographic variability, fuel-use variability, seasonal variability, and income variability are significant to understand the correlation between temperature and electricity demand. As developing countries improve their standard of living, their use of air conditioning and other weather dependent consumption may increase their sensitivity to climate change more than in developed countries.

Electricity demand sensitivity to climate change

The degree to which electricity demand in a given country might be sensitive to changes in climate will depend both on its climate type, on its energy mix, and on the level of its economic

development. Electricity demand displays a significant elasticity to temperature changes, and temperature changes will have a different impact on the electricity demand according to regional distribution. If a warmer climate will be at high latitude it will tend to reduce space heating demand and thus fuel consumption (heating effect), whereas at lower latitudes cooling loads will increase with higher temperatures (cooling effect). This means that global warming will increase electricity demand but overall energy use could instead decrease. In a study conducted in 2002, it is estimated that by the year 2100 the benefits of climate change in the energy sector (reduced heating) will amount to 0.75% of GDP globally, whereas the damages (increased cooling) would be approximately 0.45%.

The impact on electricity demand also depends on the mix of resources used for heating and cooling. Indeed, cooling systems such as air conditioning require more energy than a similar amount of heating, and we should also take into consideration that if there exist other options for heating, such as wood and gas, cooling can only be powered by electricity.

If there is a strong positive correlation between electricity consumption and summer temperatures, an increase in average yearly temperature should be associated with a rising electricity demand. Moreover, the consequences of warming temperatures on electricity demand can become more evident in countries where growing economies and improving standards of living require more and more power.

The combination of these factors, i.e. geographic variability, fuel-use variability, seasonal variability, and income variability are significant to understand the correlation between higher temperature and higher electricity demand. In newly industrialized countries, especially those geographically situated in lower latitudes this correlation can be higher. Their use of air conditioning and other weather-dependent consumption may considerably increase their sensitivity to climate change.

Electricity demand sensitivity to GDP

The elasticity of electricity demand to temperature is higher than elasticity of electricity demand to GDP. Income and wealth may affect the capability to adapt to climate change.

Although this should not change the relationship between consumption and temperature, it may make some relationship stronger or weaker. Developing countries are not only more vulnerable to changes in seasonal temperatures and in precipitation patterns given their high population density and low standards of living, but also would be expected to have limited growth in their electricity demand because of low average incomes. Surprisingly, according to a study conducted by ExxonMobil on “The Outlook for Energy: a View to 2040”, Africa is expected to experience a rapid growth in electricity use, with demand increasing 335 percent due to high rate of population growth and urbanization level.

In newly industrialized countries such as China and India increased urbanization and industrial growth create significant drivers for electricity demand. In India, electricity demand is expected to more than quadruple, and in China it is supposed to more than double by 2040. In total, non OECD electricity demand will surge by 150 percent by 2040. On the other hand, the OECD countries will experience demand rise about 25 percent by 2040, with the United States accounting for the largest increase in demand and representing the 50 percent of the growth in OECD electricity use.

In addition, the fuel mix significantly changes by region. Non OECD countries will experience growth across all fuel types (except oil) through 2025, with coal capturing the largest share, followed by natural gas. In China, India and in Africa, especially in the South Mediterranean Rim, countries seek to diversify their electricity supply through the development of renewable energies that are becoming a larger part of the fuel mix although their contribution remains relatively small at less than 10 percent. In OECD countries, a transition from coal to natural gas, driven by the emergence of greenhouse gas policies and the shale gas revolution, along with an additional share of renewable and nuclear generation will become more significant after 2025.

The challenge in the next 30 years is that non OECD countries will lead growth in electricity demand, where the need of electricity is linked mainly to growing urbanization, improvement of standards of living, as well as to climate change. In short, in these countries due to climate variability electricity demand will grow with the aim to desalinate the water and to switch on the air conditioning.

Case study 1: The European Union

The “EU ADAM project” is focused on changes in electricity demand at a microeconomic level, i.e. at the level of individuals and households. Using data on residential consumption, electricity prices, per capita income and climate data, it estimated the impacts of the IPCC climate change scenario A1B , with expected global temperature increases of well above 2˚C, on electricity consumption in Europe for the next 100 years. Scenario A1b assumes that there will be global rapid economic growth in the future and that energy will come from a balanced range of fossil fuel and non-fossil fuel sources. The project aim was not that of forecasting actual electricity demand in a future economy, but to make an estimation of the effect of temperature change on electricity demand on the present economy.

Results indicated that an increase in temperature has an impact on electricity consumption four times the size of the equivalent decrease in temperature and that there is likely to be an increase in electricity demand in the South of Europe. For example, Greece’s consumption was estimated to rise by 10 per cent and Turkey’s by 18.6 percent. In the Northern European countries it is estimated that there will be a fall in consumption. For example, Latvia would reduce its consumption by 19.5 percent and Lithuania by 20.8 percent. For central Europeans, the increases in summer temperatures and reductions in winter temperatures come fairly close to leveling out over the year.

Compared to the potential impacts of changes in income, demography and technology, these effects are small. However, the estimation does not consider future changes in supply or the more detailed regional and seasonal effects on supply and transfer of electricity, which may have an impact on price and therefore consumption. For example, there may be greater demand in hotter and colder months or in certain geographical areas. Lastly, the study does not include other effects of climate change that might indirectly influence electricity demand, such as changes in wealth and energy efficiency, or new technologies such as electric cars.

Case Study 2: Trinidad and Tobago

In the “Assessment of the economic impact of climate change on the energy sector in Trinidad and Tobago” published in October 2011 by the Economic Commission for Latin America and the Caribbean, some interesting data on the relationship between temperature and electricity

demand have been found. Variations in average annual temperature due to climate change for the A2 scenario are expected to lead to an increase in electricity consumption per capita, equivalent to an annual increase of 1.07 percent over the 2011 baseline value of electricity consumption per capita. Under the B2 scenario, the average annual increase in electricity consumption per capita over the 2011 baseline value is expected to be 1.01 percent. The estimated economic impact of climate change on electricity consumption for the period 2011-2050 is valued at US$ 142.88 million under the A2 scenario and US$ 134.83 million under the B2 scenario. These economic impact estimates are equivalent to a loss of 0.737 percent of 2009 GDP under the A2 climate scenario and a loss of 0.695 percent of 2009 GDP under the B2 scenario.

Case Study 3: Thailand

In lower latitudes, cooling loads will increase with, for example, South East Asian electricity demand expected to increase by 5 to 10% as a result. In Thailand, the electric utility company EGAT serves mainly agricultural, residential and commercial customers. Among these customers many are increasing their standards of living. This factor coupled with the growing temperatures make the use of air conditioning an important share of the use of electricity. Air conditioning systems are heavily used in the summer, but also in some other periods of the year. Thus, a substantial share of Thai consumer demand consists of weather-sensitive load, and climate changes effects are likely to substantially increase the air conditioning loads.

Studies have found that in Thailand there is a good correlation between growth in electricity demand and GDP. For example, Thai demand and GDP growth over the period from 1994 and 2004 has been found to have a correlation coefficient of 0.77 percent. Forecasts of demand growth in Thailand suggest around 5.7 percent per year up to 2020. Nevertheless, forecasts should take into account not only future economic activity and population growth, but also climate change effects.

A study conducted by researchers at the School of Engineering & Electronics of the University of Edinburgh has analyzed the effect of changes in climate on electricity demand by focusing on two different aspects of demand: the daily electricity demand and the long-term peak demand. As for this last aspect, forecasts of future electricity demand growth take into account the

future economic activity which is determined among other things by population growth. Such forecasts do not account for the potential rises in demand that climate change may bring, which may be substantial.

Conclusions

Climate change is expected to lead to changes in a range of climatic variables such as in the temperatures levels, and as electricity demand is closely influenced by these, there is likely to be an impact on power demand patterns. The magnitude of the potential impact of future climate changes on electricity demand will depend on the power use patterns in the absence of climate change, as well as long term socio-economic trends. As developing countries and newly industrialized countries improve their standards of living, their use of air conditioning and other weather-dependent consumption may increase their sensitivity to climate change more than in developed countries.