How does commercial and industrial consumption grow as countries develop?
Last summer, Kuungana Advisory has published the blog, “Why does household electricity demand not grow in some developing countries?” In this blog, we looked into how affordability acts as a constraint to residential demand growth. Our findings suggest that even if a country increases its electrification efforts, if poverty is high household electricity demand will not grow. In this blog we analyse commercial and industrial (C&I) electricity demand to evaluate how demand growth evolves as a country develops.
Electricity demand from C&I sectors has been analysed across countries at different stages of development. C&I demand, and GDP per capita (on a PPP basis) was collected to compute the GDP elasticity of demand. This measures how electricity demand (specifically from C&I sectors) responds to GDP growth. The elasticity is compared against the GDP per capita. The plot below shows the results of this analysis.
Analysis on the elasticity of demand shows a similar ‘sweet spot’ where C&I grows rapidly with GDP. This is consistent with our previous analysis of residential demand, where falling poverty rates result in accelerating growth in residential electricity demand. For countries with low GDP per capita, GDP elasticity of demand is low. This may partly reflect demand being met off-grid, by dedicated generation. Countries such as DRC have low elasticity.
As GDP increases the elasticity of demand approaches 1 and demand increases more rapidly. There appears to be a ‘sweet spot’ where C&I demand grows particularly rapidly (with elasticity values greater than 1) between 5-10 $k per capita. Ghana and Bangladesh are countries with GDP per capita in this range, where C&I demand is increasing rapidly.
For more developed countries, the elasticity drops again as C&I customers release energy efficiency gains, sometimes as a result of regulatory requirements. This can be seen, for example, in European countries where targets to lower energy demand are in place. Thus, the analysis shows countries like Germany and the United Kingdom with very low elasticities.
Country-specific factors results in outliers. Mozambique has a low elasticity, partly because the industrial sector is dominated by one large aluminium smelter. Uganda’s electricity demand from C&I sectors has grown rapidly. Interestingly, Uganda was identified as a country will rapidly declining poverty rates in our analysis of residential demand; C&I growth in Uganda may have been a factor in driving poverty reduction. South Africa has a much lower elasticity than would be expected; this is primarily a result of electricity supply being insufficient, which has resulted in massive load shedding.
Overall, we see a similar ‘sweet spot’ in the growth of C&I and residential demand for electricity. Countries where poverty had fallen rapidly see fast growth in residential demand for electricity. Similarly, there appears to be an optimal level of GDP per capita, where C&I demand for electricity grows rapidly. Many of the countries included in the analysis (notably Ghana, Bangladesh) have seen rapid growth in electricity demand from both sectors. These are important considerations when modelling or planning for generation investments.