How development affects climate sensitivity of electricity demand in India

The annual average temperature in India in 2009 was about 0.91°C above the average temperature recorded during the 1961-1990 period. This column analyses the impact of daily weather as well as long-term climate change on electricity demand in India, and how income growth influences this relationship. It shows that the marginal effect of hotter climate on electricity demand is greater when incomes are higher.

As India embarks on its developmental trajectory, demands on electricity are bound to increase. In the previous decade (ending 2010-11), while India´s GDP (gross domestic product) and its population grew at 7.7% and 1.6% respectively, its total electricity consumption (all sectors) grew at about 8.3%. While population and income growth have accounted for most of the electricity consumption growth in India, global climate change is expected to further add to it as people will adapt by buying energy-intensive equipment such as air conditioners and air coolers.

There is a non-linear relationship between temperature and electricity demand over the year as the electricity demand is positively related to temperatures in summer and negatively related to temperatures in winter. Therefore, climate change is expected to reduce electricity consumption in winter and increase electricity consumption in the summer. Also, climate change will affect electricity demand by changing how people will respond along both intensive and extensive margins of adjustment. For instance, in the short run, during summer, people may adapt by using existing cooling equipment more intensively on a hot day while, in the long run, they may choose to buy an air conditioner to mitigate expected reduction in comfort due to changed climate. Thus, while the long-term climate will determine the stock of equipment in different regions, the daily weather or temperature determines the utilisation of the equipment for heating or cooling.

Short- and long-term impact of climate on electricity demand

To capture both intensive and extensive adjustments due to climate change, I estimate the impact of daily weather as well as of long-term climate on electricity demand for 28 Indian states¹ during the period 2005-2009 (Gupta 2012, 2014). I use data on daily electricity demand, measured in million kilowatt hours (MKWh), from the operator of the national electricity grid, the National Load Dispatch Centre (NLDC). I construct cooling degree days (CDDs) and heating degree days (HDDs) using temperature data from the Indian Meteorological Department (IMD), which describe the deviation of daily average temperature from a reference temperature as a measure of severity of hot and cold weather respectively. The reference temperature is defined as the outdoor temperature at which the cooling (heating) systems do not need to run in order to maintain comfortable conditions. When the outdoor temperature is above (below) the reference temperature, the cooling (heating) systems need to operate, resulting in increased energy requirements.

Daily CDDs and HDDs are used to capture intensive adjustments. The sums of daily CDDs and HDDs over a year constitute the indicators for heat and cold stress, respectively, as well as the description of a state´s climate. I determine the cooling degree day index (CDDI) and heating degree day index (HDDI) of each state as the average of the annual cooling degree days and heating degree days, respectively, during 2005-2009 in order to analyse the impact of long-term climate on electricity demand (extensive adjustment).

I find that a 1°C increase in temperature in summer increases expected daily electricity demand by 1.5% (as a result of greater usage of cooling equipment) while a 1°C increase in temperature in winter reduces electricity demand by about 0.2% (due to lower usage of heating equipment) at the sample average of income and climate. An increase in temperature in summer has an impact on electricity consumption which is seven times the size of the impact of an equivalent increase in temperature on electricity consumption in winter.

I also find that the interaction of income with the CDDI and CDDs in summer has a much higher impact on electricity demand than the interaction of income with the HDDI and HDD in winter. As income determines how people adapt to climate change, both global warming and income growth will have asymmetric effects on electricity consumption in summer and winter.

Income growth influences climate sensitivity of electricity demand

I find that the climate sensitivity of electricity demand in India is likely to be significantly influenced by income growth. Between 2009 and 2030, India´s GDP will double if it grows at 4% per year, and treble if it grows at 6% per year². In a reference scenario with no climate change, electricity demand in India is expected to surge by 105% with 4% GDP growth and by 224% with 6% GDP growth by 2030. If average temperatures in India increase by 1°C during this period, then the demand for electricity is likely to increase by 119% with 4% GDP growth per year, and by 252% with 6% GDP growth per year, by 2030. Thus, as a result of climate change, electricity demand is estimated to be 6.9% higher than in the reference scenario with 4% GDP growth per year and 8.6% higher than in the reference scenario with 6% GDP growth per year, by 2030. This reflects the fact that the estimated marginal effect of hotter climate is greater when incomes are higher.

Over 50% of the impact of climate change on electricity demand is due to extensive adjustments in cooling and heating requirements. Thus, electricity demand models that do not account for extensive adjustments are likely to underestimate the impact of climate change on electricity demand. This is particularly true for developing countries such as India where, unlike developed countries, the penetration of cooling/ heating technologies is very low at present. In a warmer and richer economy in the future, there is bound to be rapid adoption of energy-using equipment in India. This particularly highlights the importance of potential interactions between increasing CDDs days and increasing incomes, and the impact of the resulting long-term adjustments (such as the higher penetration of air cooling devices) on the electricity sector³.

Regional variation

Additionally, I find considerable variation in the predicted impacts of climate change on electricity demand across states in India. The nature and extent of the impact will vary geographically, depending on the climate and development status of the states. The five rich and hot states - Delhi, Maharashtra, Gujarat, Andhra Pradesh, and Tamil Nadu - will therefore be the most affected in terms of electricity demand due to climate change with an estimated impact of 11-17% (with 6% GDP growth). The next most affected group includes Karnataka, Kerala, Haryana, Orissa, and Chandigarh with the estimated impact at 8-12% (with 6% GDP growth). The third most affected group comprises poor and hot states such as Bihar, Jharkhand, Uttar Pradesh, Madhya Pradesh, and all north-eastern states with the estimated impact at 3-10% (with 6% GDP growth). The least affected states are the three cold states - Jammu and Kashmir, Himachal Pradesh, and Uttarakhand. Jammu and Kashmir turns out to be the only state for which the net electricity demand is expected to reduce by 1-5.5% due to climate change in 2030. In the case of Himachal Pradesh and Uttarakhand, there will be an increase in electricity demand but it would be less than 2%.

Planning for increased electricity demand

To sum up, both changing lifestyles and economic conditions in India have made electricity demand increasingly sensitive to temperature. I find potential interactions between increasing CDDs and increasing incomes, and the impact of the resulting long-term adjustments (such as the higher penetration of air cooling devices) in the electricity sector. Policymakers will need to come up with new measures to meet increased electricity demand due to climate change. They would, for instance, have to make a choice between fossil fuels and renewable energy sources for electricity generation. The estimated impacts on electricity demand due to intensive and extensive margin adjustments will be of use to electricity production and sales companies as well in order to, (a) understand existing temperature-electricity sensitivity so as to manage risks related to unpredictable changes in energy demand under extreme weather conditions, for example, a heat wave; (b) quantify the impact of projected climate change on electricity use; and (c) forecast required future capacity investments in the electricity sector.

Notes:

The data is from 27 states of India and one Union Territory (U.T.), namely Chandigarh.
Author’s calculations based on GDP data from the Ministry of Statistics and Programme Implementation.
India being a tropical country (with relatively higher number of hot days than cold days), climate change and income growth are likely to affect cooling technologies more than the heating technologies; thus, an increase in net electricity demand is expected.