Income growth fuels electricity demand in middle-income countries

As the world races toward a carbon-netral economy, countries are electrifying everything from transportation to manufacturing. This surge in electricity consumption is prominent in rapidly growing middle-income countries, creating a new energy demand landscape.

In a study published in 2023, Fakhri Hasanov, a senior principal researcher at KAPSARC, and collaborator Brantley Liddle, from the National University of Singapore, analyzed the impact of income changes and electricity pricing on demand over time in middle-income countries. They emphasize that such insights are crucial for accurately forecasting demand and devising economic policies. Previous studies on the topic have primarily focused on high-income OECD countries.

The researchers analyzed electricity consumption, income and pricing data from 31 countries spanning nearly 50 years. This comprehensive study, the most extensive of its kind for middle-income countries, revealed a strong correlation between income growth and increased electricity use. They found that for every 10% increase in income, electricity consumption rose by about 8% , showing a direct link between economic growth and energy demand. “This may seem encouraging for climate change mitigation policies focused on increasing the electrification of energy services,” the authors say.

Changes to electricity pricing, on the other hand, had less of an effect. When the price increased by 10%, electricity demand only decreased by 0.9% on average. This suggests that industries and households in middle-income countries do not significantly alter their electricity usage when prices rise, indicating low sensitivity to price changes. 

Overall, the parameters of the relationship between income, prices, and electricity demand remained stable over time in the middle-income countries studied, with some variations among specific nations. “In the context of middle-income countries, the stability of the parameters of this relationship implies that policymakers can rely on this information when designing long-term energy, economic and environmental strategies without worrying about significant variability over time,” the researchers say.

The patterns differed from prior research tailored to high-income OECD countries. In these nations, additional income increases electricity usage, but the effect slows over time due to saturating demand and improvements to energy efficiency. 

The study’s results could be used to refine electricity demand models to reflect the characteristics of middle-income countries. These models, in turn, would inform policy-making, such as setting appropriate electricity pricing, planning expansions to infrastructure and assessing the potential impacts of economic growth on electricity demand, the authors say. “This also supports the development of long-term strategies for energy supply, demand management, and climate change mitigation in middle-income nations.”