Taken from the Let's talk Development Blog of the World Bank:
An intense debate continues on how best to provide electricity to the 1.1 billion people currently without access to it -- of whom 600 million are living in Sub-Saharan Africa, many of them in rural areas. According to a 2015 IEG evaluation, low-access countries received about 3.6 billion USD per year into the electricity sector from all sources over 2000 – 2014. The bulk of these funds has gone into extension of the traditional electricity grid. The IEG report also states that to achieve universal grid access in current low-access countries by 2030 will require over 17 billion USD per year, including about 12 billion USD per year for new transmission and distribution capacity. An additional 20 billion USD per year will be needed to address current supply inadequacies and expand generation capacity to meet growing demand. The largest share of this investment would be in Sub-Saharan Africa, given the size of the population without access and the challenges of making effective infrastructure investments there (Foster and Briceño-Garmendia, 2010).
This level of investment in grid extension is politically popular in many donor organizations and national governments, including those in Africa. It is seen – rightly – as a key part of the infrastructure development needed to achieve the economic transformation required for achieving the standard of living of industrialized countries. Moreover, there is some empirical evidence that electrification has contributed to economic growth and modernization in India, Southeast Asia, and Brazil, among other countries in Asia and Latin America. But to what degree can that experience apply to Africa?
A number of recent studies raise questions about how much the expansion in grid electrification in Africa can contribute to economic development in the nearer term. A study by Lenz and co-authors on Rwanda found that most people with the opportunity to access the grid in fact got connected, but consumption levels in both households and enterprises remained very modest, even 4 years after the connection. There was no indication of economic multiplier effects from increased productive uses of electricity at a scale beyond small shops and other small service businesses. Reliability of the grid was high during the period studied, so this was not a significant impediment to electricity usage. A recent large-scale evaluation of a rural electrification program in Tanzania confirms the subtle effects on productive use of electricity. Mostly in line with the abovementioned paper on Rwanda, the study does find reductions in the use of some traditional energy sources as well as positive effects on lighting usage and land prices as proxies for well-being. However, there are no impacts on firm creation or non-agricultural employment. This is also consistent with earlier studies in Benin and Uganda, with an analysis by Peters and Sievert for several African countries, and with the findings of a recent study in India as well as Dinkelman’s study in South Africa, which detects a positive effect on female labor supply but falling wages for women and no effect on total labor demand.
A further difficulty is that it is unlikely that the costs of rural residential grid connections can be recovered just from payments by households. This is demonstrated in recent work in Kenya by Lee and coauthors. In that study, the researchers randomly assigned a range of different up-front connection fees for grid electricity to hitherto unconnected villages not far from the grid. In one group of villages households paid the full price for the connection, in a second group only half the price, and in a third group households were connected free of charge. This allows the authors to estimate the willingness to pay (WTP) for a grid connection, which in turn reflects the direct benefits to households of having a connection.
They find that take-up rates were only high in villages assigned a zero connection fee in the experiment, and approached zero in villages with a fee equal to only 50% of the actual Kenyan connection fees. The paper furthermore provides estimates for the cost of connections, which even in an optimistic scenario considerably exceed the expressed WTP. The authors also note that there are reasons to believe that the WTP estimates do not fully reflect all benefits of grid electrification, such as spillover effects to other households (which are found to be significant, for example, in India by van de Walle and coauthors). Moreover, the population under study faces severe limits on access to finance. However, in spite of these caveats the question arises whether the excess of connection costs over expressed WTP of connected households can be justified economically.
The economic history of today’s advanced industrialized world suggests that the findings of only subtle effects of electrification on economic development are not as surprising as some might think. The diffusion and economic impacts of technological innovation might take years or decades to fully materialize, depending on other interacting processes. As David (1990) notes, in 1900, some 20 years after the first generation stations were installed in London and New York, electricity was still hardly seen in homes or factories. Moreover, even when factories in today’s industrialized countries adopted electric machinery, their productivity did not increase for another 10 or 20 years – a phenomenon that is known as the productivity paradox.
The general implication of this historic observation, which is relevant to Africa today, is that the impacts of a major push for universal grid electrification may take considerable time to play out, with long amortization periods for initial investments. The issue is not whether the establishment of a modern electrical grid with universal service ultimately is desirable. Clearly, it is. Instead, it is about the timing and strategy to achieve this goal.
Fortunately, there are lower-cost technological alternatives to grid electrification that are especially useful in providing basic service to households in rural and remote areas where infrastructure extension costs are particularly high. Costs of smaller scale off-grid technologies, most notably solar lighting devices and solar home systems in combination with improved batteries and LED lights, have decreased considerably over the last decade (see Lighting Global 2016 figures). Retail prices for off-grid solar are currently at something between 10 USD for a solar lamp and 200 USD for a 20 Watt solar home system. Many experts anticipate that cost decreases will continue into the future.
The major downside of off-grid solar is that the relatively low amount of supplied electricity limits what those systems can do for the productive use of electricity (see, for example, another analysis from Lee et al.). However, electricity usage patterns in newly electrified areas in rural Africa are often such that solar is able to meet those demands. Even in grid-covered rural areas, households and micro-enterprises use electricity mostly for lighting, phone charging, and entertainment – which can easily be provided by solar panels. Some recent studies by Grimm and co-authors for Rwanda and Bensch and co-authors for Burkina Faso have shown that off-grid solar is sufficient to meet these basic household demands. A second paper on Rwanda by Grimm and co-authors suggests that off-grid solar is highly valued by the rural population: Measuring the revealed WTP for different technologies shows that people are ready to dedicate a high share of their disposable incomes to investing in off-grid solar. Users with a higher demand and the means to pay for it can resort to a generator in the nearer term.
However, that same Rwanda study, as well as a study by Grimm and Peters on several different countries, find that increasing access through investment in off-grid solar will probably require some form of subsidies to reach the poorer strata. However, the required subsidies will be much smaller than the implicit subsidies involved in extending grid connections in the case of low demand. To cite one example, the Tanzania study mentioned previously shows that particularly if connection rates remain low, the subsidy per household connection can be as high as 6,600 USD. Hence, if subsidies are required either way, off-grid solar implies a much lower cost burden for governments aspiring to expand basic service to households in the nearer term, compared to extension of the grid.
At present, policymakers in Africa sometimes do not perceive off-grid solar as realelectricity. This view could change if it is realized that a given budget for supporting household electricity access can provide more constituents with an acceptable level of service if used for off-grid solar rather than grid electrification.
The empirical evidence we have reviewed underscores the importance of considering both on-grid and off-grid approaches for moving toward universal electricity access. This point is also emphasized in a recent IEG report on off-grid service provision. In many rural areas in Africa, impacts on economic development of grid extension in the near term may be very modest, while off-grid technologies can be more cost-effective for meeting the most highly-valued basic household needs. In regions with high business potential, industrial zones could be grid-connected to foster economic development and more sophisticated production processes. Over time, as incomes rise and populations agglomerate in higher-productivity locations, the grid can spread out from these connections. Plans for expanding household access can also incorporate subsidies to the poor for off-grid technologies. Smart subsidy schemes are needed that are consistent with active private sector participation in the off-grid solar market and that are transparent in terms of duration and phasing-out.
The authors acknowledge with gratitude comments on a draft of this blog by Moussa Blimpo (Office of the Chief Economist, Africa region), and Malcolm Cosgrove-Davies (Global Lead on energy access, Energy and Extractives Global Practice). The authors alone are responsible for the content of the blog.