Industrial energy policy: a case study of demand in Kuwait

Abstract

The purpose of building the industrial energy demand model was to assess the impact of possible policy options and forecast future energy demand under various assumptions including the impact of the possible removal of energy subsidies in accordance with the WTO agreement. The forecasting results of the three scenarios raise several important issues. With nominal energy prices staying the same (the status quo) and inflation and economic growth continuing to expand (i.e., baseline scenario), all industries are expected to have growing demand for energy. The consumption of energy in the industrial sector is projected to grow at an annual growth rate of about 3.5% throughout the forecast period. In the case of the moderate scenario, the consumption of energy in the industrial sector is projected to grow by only 1.9% annually throughout the forecast period. If all the energy subsidies are removed, as in the extreme scenario, the consumption of energy in the industrial sector is projected to grow by only 1.5% annually throughout the forecast period. Moreover, as for inter-fuel substitution, the model forecast indicates that the consumption of electricity and natural gas will decline while the consumption of oil products will increase in all scenarios. The results indicate that changing the price structure of energy resources should be done in a comprehensive manner. In other words, electricity prices should be adjusted upwards instantly with the adjustment of oil products and natural gas prices, otherwise, a massive inter-fuel substitution will occur within the various industries.