Why electricity demand is linked to GDP

Electricity demand linked to GDP

The power utilities industry is also affected by macroeconomic indicators. As mentioned in the previous part in the series, electricity production is linked to economic growth.

The change in economic output is related to the electricity consumed. A country’s economic output is measured by the gross domestic product (or GDP). GDP is a key macroeconomic indicator for the power industry. Electricity demand and GDP can be used as indicators for each other.

Electricity and GDP

Electricity is the backbone of a nation’s progress. All of the industries need electricity to operate—directly or indirectly. When a business flourishes, the electricity consumption increases.

The above chart shows the historic relationship between electricity use and GDP. They depend on each other. As a result, it’s logical that GDP and electricity consumption are linked.

A country’s GDP is the sum of its industrial, agricultural, and services output. The services and agriculture sectors are light to moderate electricity users. The industrial sector is very dependent on electricity. As a result, the relationship between GDP and electricity consumption is higher for countries that have high exposure to the industrial sector in the GDP. The industrial sector forms close to 20% of the GDP in the U.S.

It’s important that investors watch GDP data. The data can help investors understand changing electricity consumption before they invest in power companies—like Dominion Resources (D), NRG Energy (NRG), AES Corporation (AES), and Public Service Enterprise Group (PEG). Another investment opportunity is the Utilities Select Sector SPDR (XLU).