The residential sector in Latin America and the Caribbean is experiencing a marked transition to modern energy consumption. Between 1971 and 2013, residential electricity and gas consumption has more than tripled, which is a trend that is strongly associated with economic growth in the region. This association presents significant challenges regarding how to sustainably meet future energy demand that results from the improved economic conditions of all households in the region.
In order to contribute to understanding the evolving energy consumption at different stages of economic development, a recent IDB study examines the composition and sensitivity of residential energy consumption to changes in per capita income in a sample of 104 countries. By focusing on the residential sector, this analysis includes fuels used in the home, excluding fuel used for private transport. The results indicate that the income elasticity of modern energy use takes the form of an inverted U along the global distribution of earnings. That is, increases in income translate into more than proportional increases in the consumption of electricity and gas. However, this happens at a higher level of income, from which the elasticity is gradually reduced. Even at higher levels of per capita income, negative elasticities are observed, suggesting the presence of net energy savings.
These results explain the trends in energy consumption per capita in different regions, and in particular, show that Latin America and the Caribbean is currently in a phase that is highly dependent on modern energy to accompany economic development. The figure below summarizes historical trends in energy consumption in the residential sector, showing the low levels of economic development –to the left of x axis– and that the total per capita consumption (black line) is mainly composed of biomass. As income increases, the consumption of biomass is significantly reduced and is replaced by so-called modern transition fuels and modern fuels. Transition fuels (e.g. Kerosene, coal) increased less sharply and only to a certain level of per capita income (around US $ 25,000 per year), from which the consumption of electricity and gas explains all growth in residential energy consumption. As the income level continues to increase, reductions in per capita energy consumption have been observed, which provides evidence of negative income elasticities in countries with higher levels of economic development.
Residential Energy Consumption in the Global Distribution of Income
The fact that income elasticity is not constant throughout the stages of economic development has important implications for public policy design. While there is a strong positive association between modern energy consumption and per capita income, it is expected that – in the residential sector – net efficiency gains will be shown to reduce energy consumption. These considerations may have important effects on energy demand projections and associated investment needs. Appropriate energy efficiency measures can contribute significantly to reduce future investment requirements, and in turn, to put the region on a path of more sustainable energy consumption. This calls for the need to distinguish policies that accelerate technological improvements to close the energy efficiency gap in relation to developed countries.
It is noteworthy that, despite the observed transition to modern energy sources, Latin America and the Caribbean still faces the challenge of providing universal access to clean and affordable energy. In this region the use of biomass, liquid fossil fuels and coal is still considerable. On average, 45% of per capita residential energy use corresponds to such fuels. Moreover, in low-income countries, their share reaches 80% of per capita energy consumption. For these reasons, the goals of efficiency, equity and sustainability in the energy sector are complementary and are priorities on the agenda with our customers. In order to support this agenda, in a forthcoming publication we will examine consumption and household spending on energy, including transport fuels.