Executive summary
Falling electricity consumption in advanced economies weighs on global growth in power demand Global electricity demand growth is expected to ease in 2023 before accelerating in 2024. Demand is expected to grow by slightly less than 2% in 2023, down from a rate of 2.3% in 2022 and the average annual growth rate of 2.4% observed over the 2015-2019 period. This moderation is strongly driven by declining electricity demand in advanced economies, which are dealing with the ongoing effects of the global energy crisis and slower economic growth. In 2024, as expectations for the economic outlook improve, global electricity demand growth is forecast to rebound to 3.3%. Electricity demand in the European Union is set to decline in 2023 for the second year in a row, falling to its lowest level in two decades. EU electricity demand is expected to record a 3% drop in 2023, after already falling 3% in 2022. This is despite strong growth in electrification with a record number of electric vehicles and heat pumps sold. Following these two consecutive declines, which together amount to the region’s largest slump in demand on record, EU electricity demand is set to drop to levels last seen in 2002.

Declines in fossil-fired electricity generation are becoming structural The accelerated pace of new renewable capacity additions shows that renewable generation could surpass coal as early as 2024, if weather conditions are favourable. This is supported by the expectation that coal-fired generation will slightly decline in 2023 and 2024 after rising 1.5% in 2022, when high gas prices boosted demand for alternatives. Increases in coal-fired generation in Asia in 2023 and 2024 are poised to be offset by strong drops in the United States and Europe. Renewables are set to meet all additional demand in 2023 and 2024. With global demand growth easing in 2023, incremental increases in renewables alone are expected to cover all additional demand not only this year, but also in 2024, when demand growth is expected to accelerate again. By 2024, the share of renewable generation in global electricity supply will exceed one-third for the first time.

Demand: Global electricity demand growth expected to ease in 2023 Russia’s invasion of Ukraine and the ensuing global energy crisis ignited inflation and stifled economic growth in many parts of the world, as spiking gas and coal prices raised the cost of power generation and drove up electricity bills. Despite these headwinds, global electricity demand remained resilient in 2022, growing by 2.3%. The impacts of the crisis continued into 2023, with economic slowdowns observed in various regions and particularly pronounced declines in electricity demand in advanced economies. As a result, despite robust growth in emerging economies as well as record electric vehicle and heat pump sales leading to rising electrification rates in the transport and residential sectors, global electricity demand growth is expected to be subdued in 2023. Our previous growth forecast of 2.6% has been revised downward to 1.9%, which is slower than the 2.4% average annual growth over the 2015-2019 period. We forecast global electricity demand will grow at a higher 3.3% rate in 2024 as the economic outlook improves.

Electricity demand in the United States rose by 2.6% in 2022, driven by economic growth as well as increased heating and air conditioning use. While the weather in early 2023 has been milder than a year earlier, scorching summer temperatures, especially in Texas, are expected to drive up electricity consumption for cooling. Despite that, overall cooling demand is estimated to have fallen year-on-year during H1 2023, as other regions have had a milder summer so far. At the same ime, slowing economic growth is putting downward pressure on electricity demand, as indicated by the 16% year-on-year decline in the average manufacturing Purchasing Managers’ Index in H1 2023. We expect electricity consumption in the US to decline by 1.7% in 2023 and then rebound in 2024 at a moderate 2% rate.

The European Union’s electricity consumption decreased by 3.2% in 2022, the second largest drop since the 2009 global financial crisis, exceeded only by 2020’s plunge due to Covid-19. The downward trend became apparent in the second half of 2022 and continued well into the first half of 2023. EU electricity demand in H1 2023 fell almost 6% from the same year-ago period. For the full year we expect an overall drop in demand of 3%. With that, EU electricity consumption will have declined for two years in a row at a rate unprecedented since the foundation of the Union. We anticipate a modest 1.7% rebound in 2024, but with significant uncertainty linked to the recovery of industrial demand. The biggest question is how much of the reduction in demand was temporary and how much will be permanent.

No rebound in overall energy-intensive industrial output in sight in the first half of 2023 For the first half of 2023, weather had a limited impact on the staggering 6% yearon-year decline in overall electricity demand in Europe as a milder January was largely offset by a colder February. Consequently, the main drivers of the decline in H1 2023 have been non-weather-related factors, with no significant rebound in the overall output of energy-intensive industries despite wholesale prices coming down from their record highs. Some companies in the steel industry started reversing their curtailments that had been implemented in 2022. However, in sectors such as aluminium, temporary production cuts were followed by permanent closures, producers such as Talum and Slovalco being two examples of companies permanently halting the production of primary aluminium.

Industrial competitiveness in Europe is under pressure The competitiveness of European energy-intensive industry is threatened by high energy costs. Another challenge is support packages overseas, such as the Inflation Reduction Act (IRA) in America, the Green Transformation Act in Japan and tax incentives in China. These developments are influencing production curtailment, plant closures, and the pausing and diverting of investment. Chemical group BASF has announced plant closures and permanent downsizing in Europe. Volkswagen paused plans for a battery plant in Eastern Europe and is instead building a factory in Canada, taking advantage of lower electricity prices and the Canadian Inflation Reduction Act. German paper producer Varel abandoned plans to expand production capacity, citing high costs and uncertain economic outlook as the reasons of its decision. Small and medium-sized businesses in industries such as paper and automation have gone insolvent as high energy prices mean they are no longer profitable. Bankruptcies among EU businesses reached a record high in Q4 2022, up about 27% percent from the previous quarter, with high energy costs being a major driver. The vast majority were small and medium-sized enterprises.

In India, Central Electricity Authority’s Load Generation Balance Report 2023-24, published in March 2023, estimates that sub-regions in India may face power supply deficits ranging from 4% to 11.3% of their respective peak demand. However, as each region is expected to experience its peak demand at different times, power imports and exports between regions would allow for some balancing. The country as a whole is expected to have a surplus of only 0.7% to meet the peak electricity demand (estimated at around 230 GW), indicating a tight supply situation. In June 2023, with increasing temperatures, peak demand of 223 GW was already observed. India has installed significant solar generation capacities in recent years, which helps meet daytime peak demand for cooling. However, evening peaks when the sun does not shine but temperatures remain very high pose a significant challenge to the system. In such evening hours, the sufficient availability of dispatchable capacities of hydro, coal- and gas-fired power plants becomes crucial. New generation capacity additions in recent years have lagged behind the increase in peak power demand, leading the Ministry of Power in June 2023 to issue guidelines for Resource Adequacy Planning Framework for electricity to ensure that generation capacity is added at a pace matching growth in demand. A new tariff scheme was also outlined, which introduces varying timeof-day tariffs between solar hours, normal hours and peak hours to incentivise the shifting of demand from the evening to daytime. The new tariffs are to come into effect during 2024 and 2025.

In Europe, according to the summer outlook of the European Network of Transmission System Operators for Electricity (ENTSO-E), no major adequacy risks are expected for the summer of 2023. Nevertheless, as shown in our recent analysis, additional demand from cooling remains substantial, especially in Southern Europe and France. In the case of unexpected unavailabilities, electricity imports will play a significant role to meet demand, as also highlighted by the ENTSO-E outlook.

Supply: Renewable generation set to overtake coal In December 2022, IEA’s Renewables 2022 report estimated that renewable generation will overtake coal as the largest source of electricity by early 2025. Our analysis now shows this moment could come as early as 2024 under favourable weather conditions as a result of the accelerated pace of renewable capacity additions highlighted in the Renewables June 2023 Update, as well as because of the plateauing of electricity generation from coal. Coal-fired generation grew by 1.7% in 2022, supported by gas-to-coal switching in many regions due to high gas prices, but is expected to decline slightly in 2023 and 2024 as increases in Asia are offset by strong declines in the USA and Europe. Gas-fired power generation remained relatively flat in 2022 and we expect a slight increase of less than 1% in 2023. This upward revision from our previous forecast is mainly driven by strong increases in the United States as well as a return to coal-to-gas switching in various other regions because of lower gas prices. However, a colder winter and potential supply issues, especially in Europe, could boost gas prices again and support renewed gas-to-coal switching.

Average capacity factors in Brazil, Canada, and the European Union have declined over the last two decades The most striking fall has been in Brazil, where hydro capacity factors recorded a staggering drop from an average of 56% in 1990-2012 to an average of 44% in 2013-2022. Severe droughts in 2014-2017 and 2019-2021, especially in states like Sao Paulo, Rio de Janeiro, and Minas Gerais, caused water shortages, crop production declines, and power cuts. During droughts, priority access to water is given to human and animal consumption, followed by irrigation, and only then hydropower. The outlook for hydropower generation in 2023 is much improved. Hydroelectric reservoir levels reached a 12-year high by May 2023 due to heavy rainfall and average capacity factors are expected to rebound significantly for 2023Nevertheless, insufficient reservoirs are resulting in the release of surplus water and curtailment of potential hydropower generation as reservoirs maintain a waiting volume to reduce the risk of flooding in the case of heavy rain.

Canada has also seen reduced hydropower capacity factors, dropping from an average of 58% between 1990 and 2015 to 54% from 2016 to 2022. Western Canada, including British Columbia and Alberta, has faced recurrent droughts. In 2015, southern British Columbia experienced the highest drought rating, and Alberta declared an Agricultural Disaster Area with strict water restrictions. Droughts in 2017 and 2020-2021 in the south and west of Canada further impacted agriculture, ecosystems, and water resources. Moreover, regional differences in precipitation and hydropower generation can be observed across Alberta, British Columbia, Ontario and Quebec.

Emission intensity of power generation is set to fall at a faster pace Whereas global CO2 emissions from power generation are expected to plateau and slightly decline out to 2024, its emission intensity is set to fall at a faster pace. We expect a 3% decline in 2023, followed by a 4% drop in 2024, which would be the largest decline in emissions intensity over the period 2014-2024. In 2022, the European Union was the only major region that saw a year-on-year increase (+7%) due to increased coal-fired generation. But with the expected strong drop in fossil electricity generation in the next two years, the EU is set to have the fastest rate of decline (averaging 17%) in emission intensity among large-scale energy consuming regions.

Arbitraging price differences using storage systems is becoming more attractive as negative prices, spreads and volatility increases. For example, in Australia, large-scale battery energy storage saw record high revenue in 2022. The average daily standard deviation of prices represents the daily volatility and can be used as a good proxy to compare energy arbitrage potential, especially for storage systems with shorter charging and discharging cycles such as battery systems. For example, average daily standard deviation on the hourly day-ahead market increased in the Netherlands from about EUR 9/MWh in 2017 to a massive EUR 61/MWh in 2022, then falling to EUR 32/MWh in H1 2023. The large increase after 2020 is due to soaring gas prices, as gas is often the marginal generation source that sets electricity prices. The growing share of renewables was a contributor to the number of hours with lower prices.

Source:http://IEA