Most people would agree that energy is fundamental to economic growth. And at the macroeconomic level, the correlation between electricity consumption and economic development is strong. So it is not surprising that electrification – especially in rural areas – is a top priority of many developing countries. A lot of money is being invested in rural electrification. But in a market where reaching consumers requires large upfront investments (electricity infrastructure) and forward thinking, execution is not as simple as throwing money at the problem. While there is definitely some encouraging evidence that electrification changes the behavior and welfare of target households for the better, it does not appear to always do so. It’s also quite costly, and more importantly, not very profitable (if at all) for electric utilities. On top of all this, expanding electricity access to the 1 billion people without it has the potential to make or break climate change mitigation targets, depending on whether countries rely on traditional (i.e., fossil-fuel) power sources or renewable, low-carbon ones.
The challenge of determining the precise impacts of electricity access is that places that get such access tend to be the places where incomes and the economy are already on the rise. So it is difficult to disentangle the effect of electricity from the pre-existing trend of economic development in the target population. With clever research design, however, the economics profession has now assembled some pretty good evidence. In South Africa, expanding electricity access has been associated with short-term gains in female employment – perhaps because electricity frees rural women from their usual household duties. In India, access has been linked to larger agricultural incomes and concurrent increases in household expenditure. In Brazil, major hydropower projects have led to long-run rises in the Human Development Index as well as home valuations. And in El Salvador, electrification has reduced indoor air pollution by reducing the need for direct combustion of dirty fuels in the household.
Yet not all the evidence is encouraging. A second study in India finds no clear economic impact of the country’s flagship rural electrification program. Similarly, the results of a randomized experiment (the gold standard for research design) introducing electricity infrastructure in rural Kenya indicate rather low household demand for electricity. Low demand is a bad sign; it is partial confirmation of the logic that rural electrification is an underwhelming profit proposition for electricity providers. Rural areas tend to be relatively poorer and less densely population, which suggests that revenue from electricity consumption in these areas may be much lower than in urban regions. Moreover, rural areas are usually pretty far-flung with respect to existing infrastructure, so the cost of expanding to those areas is high. In many cases, rampant electricity theft and low levels of actual payment for power exacerbate the intrinsic problem of high costs and low demand in the context of rural electrification. Indeed, the Kenya study finds that the costs of the program outweigh the benefits.
One potential solution for the immediate future is micro-grid or off-grid electric power. Village- or area-specific electricity systems likely require much smaller investments than a full expansion of infrastructure out from existing systems. Off-grid power sources – such as standalone solar panels, for instance – would be even lower cost. The question is, is there demand for such an electricity product – i.e., would this potentially lower-capacity, less reliable power product actually yield benefits for the target population? And, furthermore, would this stopgap solution aid or impede the longer-term achievement of unrestricted, continuous electricity access? Off-grid solar panels, for example, are not efficiently scalable, so one would not want to just keep building additional units as a long-run solution. However, if off-grid access helps to “develop” demand for power in rural areas, then it could act as an effective bridge to full-scale grid access down the road. India is already testing the waters here, teaming up with a group of researchers to pilot an off-grid solar power product in the rural villages of Bihar state.
Image courtesy of Flickr. Originally published by S&S on November 17, 2016.