Residential energy markets

Summary: About 30 percent of final energy is consumed in the residential sector, much of it for space heating and cooling. Emerging economies are driving anticipated growth of 1 percent per year in this sector through 2030.

The residential sector accounts for about 30 percent of overall final energy consumption worldwide. The sector includes energy use in residential buildings, mainly for space heating, cooling, water heating, lighting, appliances, and cooking equipment. Consumption differs significantly between developed and less developed countries: While in a developed country (according to the United Nations’ definition) per capita residential use may average about 683 kgoe per year, residential energy use in a developing country may average less than one-third that amount, about 204 kgoe. Until 2030, worldwide residential energy demand is expected to rise about 1 percent per annum. Main drivers are emerging countries such as China and India, where growing economic prosperity is leading to higher consumption in space heating and cooling as well as electrical energy use. Nevertheless, the upward trend in final energy use due to growing wealth in emerging countries and globally rising urbanization is expected to be partly offset by efficiency gains. Since adoption of the Kyoto Protocol in 1997, party states have been trying to reduce carbon dioxide (CO2) emissions by fostering energy efficiency in residential buildings and by promoting green energy sources, such as solar photovoltaic technologies, solar thermal collectors, and small wind turbines. In this context, the speed of market penetration, on both the suppliers’ and the consumers’ sides, is a challenge on the path toward sustainable residential energy use.

Developed Countries

As noted, per capita residential energy usage in developed countries is higher than in developing countries. This difference results in large part from residential consumers’ demand for energy-using appliances in developed nations. Higher per capita income leads to a higher consumption of energy-intensive goods, such as refrigerators, washing machines, and television sets. The positive relationship between increases in per capita income and energy consumption, especially the use of electricity, was stable until the early 1970s. The oil crisis and dramatically increased energy prices boosted the uptake of more energy-efficient technologies in households. In company with an increasing saturation of households with energy intensive appliances, the growth of energy consumption fell behind per capita the income dynamic. With regard to energy price changes, demand is less sensitive—especially in the short run—because people generally continue to consume electricity for space heating and cooling, cooking, refrigeration, lighting, and so on, even during a recession.

In contrast to political objectives, per capita consumption in developed countries is expected to rise moderately until 2030, mainly driven by increasing incomes but slowed by initiatives for residential energy conservation. The European Union (EU), for example, sought to reduce 20 percent of overall CO₂ emissions by 2020, mainly by fostering energy efficiency in the residential sector. Energy conservation in space heating and cooling in this context is of major importance. In addition to technical solutions, behavioral approaches seek to sensitize individuals’ consuming behavior. One instrument is the introduction of smart meters to measure energy for heating and electricity. Smart meters allow individuals to monitor energy consumption and costs in real time. Scientific studies provide encouraging evidence for significant energy conservation simply through modified individual behavior.

In developed countries, residential energy supply is strongly centralized. Following the idea of scale economies, most residential energy is delivered by regional providers through a dense network of electricity and natural gas grids. In countries of the Organization for Economic Cooperation and Development (OECD), the main fuels are natural gas, oil, and electricity, accounting for more than 90 percent of residential energy supply. However, the residential energy mix varies significantly between states. For example, in European countries, the most important fuel is natural gas, while the share of electricity in North American states and Pacific OECD countries is significantly higher. Moreover, especially in Russia but also in other (mainly transition) economies, district heating provides a large share of households’ heating supply. Until 2030, residential energy supply is expected to change to a more intense usage of renewable energy sources. This major (and already observable) trend for developed countries is accompanied by an increasing share of decentralized production of residential energy, using sources such as solar photovoltaic (PV) systems, solar thermal collectors, and small wind turbines. To reach the era of carbon-neutral residential energy supply (which, for example, Germany’s government has predicted it will by 2050), several challenges have to be overcome: the adjustment of the energy network infrastructure, dramatically increased energy efficiency in the housing stock, and a change of individuals’ routines and habits.

Developing Countries

In emerging and developing countries, heating and cooking consume the largest share of residential energy. In contrast to developed countries, households are less equipped with energy-intensive appliances. However, residential energy demand has risen more rapidly than per capita income. This rise is due to the fact that the saturation with energy-intensive appliances in developing countries is much weaker.

In this context, urbanization plays an important role: Urbanization is associated with better economic welfare and offers access to more convenient fuels, such as liquid petroleum gas (LPG), natural gas, and electricity. Since the availability of those sources allows for consuming energy-intensive goods, a catching-up in consumption and the increase of disposable income can be identified as main drivers of higher residential energy utilization. Generally, economic development is accompanied by a decline in the share of energy use for basic requirements, such as cooking and lighting, while energy consumption for space heating, water heating, refrigeration, appliances, air-conditioning, and other modern uses grows.

However, development in consumption varies remarkably across regions. While, for example, per capita demand for residential energy has sharply increased in the Republic of Korea since the early 1980s, India’s consumption has remained relatively constant until today. This result has to be interpreted in the light of differing degrees of urbanization and economic development: Until today, about 70 percent of India’s population has lived in rural areas without being connected to energy networks. In contrast, population density in the Republic of Korea is high, and more than two-thirds of the Korean population live in urban areas. Furthermore, economic development plays an important role. Gross domestic product (GDP) per capita in Korea rose from about $1,400 (purchasing power parity in current dollars) in 1975 to over $33,100 in 2023. Within the same period, India’s GDP per capita rose from $425 to about $2,484. Today, Korea can be characterized as a developed country, while India still falls into the category of an emerging economy.

These findings have implications for the fuel mix in residential energy markets. Generally, traditional fuels, such as wood, charcoal, and agricultural waste, are the most important residential energy sources in developing countries. Urbanization in this context creates access to commercial fuels but reduces opportunities for using biomass given the inconvenience of its transportation and storage. Nonetheless, use of traditional fuels in many cities of the developing world remains high among low-income groups. An economic upturn in less developed countries in the future would result in a sharply rising residential energy demand. The use of electricity in particular is expected to rise because of a higher endowment of private households with electronic appliances.

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