Recently, the International Energy Agency (IEA) released its Global Electricity Market Report (2023-2024) (updated version), which states that overall growth in global electricity demand is expected to slow in 2023 as advanced economies grapple with the ongoing impact of the global energy crisis and economic slowdown.
EU Electricity Demand to Reach 20-Year Low
The report predicts that global electricity demand growth will slow in 2023 and accelerate in 2024. Global electricity demand is projected to grow at a rate of just under 2% in 2023, down from 2.3% in 2022 and 2.4% per annum over the 2015-2019 period. The slowdown is strongly driven by declining electricity demand in developed economies, which are coping with the ongoing effects of the global energy crisis and slowing economic growth.In 2024, global electricity demand growth is expected to rebound to 3.3% as expectations for the economic outlook improve.
Electricity demand in the European Union is set to fall for the second consecutive year in 2023 to its lowest level in 20 years. The EU is expected to see a 3% drop in electricity demand in 2023, after a 3% drop already in 2022. This has occurred despite a record surge in sales of appliances and heat pumps. Following these two consecutive declines, electricity demand in the EU will fall to 2002 levels, which together constitute the region’s largest-ever drop in demand.
Europe’s energy-intensive industries have yet to recover from last year’s production decline, as evidenced by the EU’s 6% year-on-year decline in total electricity demand in the first half of 2023. Nearly two-thirds of the net reduction in EU electricity demand in 2022 is estimated to come from energy-intensive industries, which are struggling to cope with rising energy prices. This trend continues through 2023. This is despite the fact that the prices of energy commodities and electricity have fallen from previous record highs. The European Union is at a crossroads as policy developments abroad to attract industrial investment put pressure on Europe’s industrial competitiveness. The outcome of ongoing policy discussions could determine the future of its energy-intensive industrial sector.
Sharp increase in electricity consumption in emerging economies
Despite a significant drop in demand from developed economies, growth is evident in emerging economies such as China and India. According to the report, Japan’s electricity demand is projected to fall by a whopping 3% in 2023, while the US is expected to see a decline of nearly 2%. In contrast, China’s electricity demand is projected to rise by 5.3% in 2023 and 5.1% in 2024, slightly below the 2015-2019 average of 5.4%. India will grow at an average annual rate of 6.5% during the outlook period, exceeding the 2015-2019 average of 5.2%.
The accelerating rate of increase in installed new renewable energy capacity suggests that the share of electricity generated from renewables could overtake coal as early as 2024 if weather conditions are favorable. That is, installed coal-fired power generation will fall slightly in 2023 and 2024 after rising 1.5% in 2022, with higher gas prices acting as a catalyst to accelerate this process. The report predicts that the increase in coal-fired generation in Asia in 2023 and 2024 will be offset by a sharp decline in electricity consumption in the United States and Europe.
Renewables will meet all the additional demand in 2023 and 2024, the report notes. As global demand growth slows in 2023, incremental growth in renewables alone is expected to cover all additional demand not only this year but also in 2024, when demand growth is expected to accelerate again. By 2024, renewable generation will account for more than a third of global electricity supply for the first time.
Carbon emissions from power generation will fall
The report provides a relatively optimistic view of carbon emissions from power generation, noting that the world is rapidly approaching a tipping point where global fossil-fueled power generation will be increasingly replaced by clean energy generation.
By 2024, fossil-fueled power generation is expected to decline fourfold in six years. Declines in fossil fuel use have been relatively rare before. It has occurred mainly in the aftermath of global energy and financial shocks, such as those following the oil crisis of the 1970s or during the Great Recession of 2009, when overall demand for electricity was subdued.
In recent years, however, fossil fuel supplies have tended to lag or decline even as electricity demand has expanded. These trends – driven by strong growth in renewable energy – suggest that the decline in fossil generation is becoming structural. The world is rapidly moving towards a tipping point where global fossil fuel generation begins to decline and is increasingly replaced by clean energy generation.
Increases in emissions from electricity generation in China and India are expected to be offset by reductions elsewhere. The European Union alone accounts for 40% of the total projected reductions in electricity generation emissions in 2023 and 2024, excluding China and India. After the European Union comes the United States, where renewable energy deployment is growing strongly and natural gas is increasingly replacing coal-fired supplies.
Extreme weather, unexpected economic shocks, and changes in government policy may cause emissions to rise in a given year. However, the overall trend in global power sector emissions is expected to continue unchanged, with emissions declines becoming more frequent during cycles of declining emissions.
Wholesale electricity prices begin to fall
Commenting on electricity prices in a number of EU countries, the report notes that European countries such as Germany and the Netherlands doubled the number of hours in the first half of 2023 in which electricity costs fell below zero compared to the same period in 2022. This is due to strong renewable energy production and sometimes a significant reduction in demand. Meanwhile, in other markets such as South Australia, where variable renewable penetration is high, the trend is even more dramatic.
In 2022, wholesale electricity market prices there fall by almost 20% to even below zero, compared to less than 1% in Germany and the Netherlands. Negative prices indicate that renewable power generation is not flexible enough and that the demand side does not have adequate price response mechanisms or sufficient storage capacity for energy hedging. Negative electricity prices also signal investment in solutions and technologies to increase system flexibility. These signals must be accompanied by an update of the regulatory framework to incentivize demand-side flexibility and storage in order to increase the flexibility of the wider system.
Wholesale prices remain high in many countries despite significant declines, although there are regional variations across countries. With the prices of energy commodities, such as natural gas and coal, falling significantly in the first half of 2023, wholesale electricity prices have already declined from previous peaks in many regions.
European wholesale prices have halved from their record highs in 2022 and are close to their 2021 average. Nonetheless, average prices in Europe are still more than twice as high as in 2019. Similarly, average wholesale electricity prices in India in the first half of 2023 are still 80% higher than in 2019, and in Japan they are 30% higher than in 2019. In contrast, wholesale power prices in the United States have fallen almost to 2019 levels.
