Does electricity access lead to economic growth and improved development outcomes? An EEG webinar considers the evidence

There is general acceptance in the development community that access to electricity is a driver of economic growth. However, while a relatively large body of evidence supports this, recent research has questioned the assumption. EEG recently hosted a webinar on whether energy access promotes economic growth, looking at findings from a range of studies. Programme director Simon Trace summarises the main points that were discussed.

Energy projects are often developed on the assumption that once households and businesses are provided with access to electricity, they will automatically make use of the energy and will realise social and economic benefits, such as improvements in education, health, wellbeing, and employment opportunities.

A number of studies have provided evidence that electricity access delivers economic benefits. However, others have come to different conclusions, and question whether expanding access to electricity alone does in fact lead to economic growth and improved development outcomes.

We recently held a webinar to discuss some of this research, and to also debate how productive uses of electricity can be improved and promoted; the role that new technology, finance, markets, and electricity reliability play in enhancing the economic benefits of electricity access; and how the wider social benefits of electrification can be improved. The session brought together a leading panel of experts who have all studied the link between energy and economic growth. We also welcomed participation from our live audience, who helped to shape the discussion by asking questions and sharing their views and experience.

We firstly looked at two studies that suggest that providing households with electricity alone is not enough to drive economic outcomes in meaningful ways.

Dr Kenneth Lee, director of the Air Quality Life Index (AQLI), which was developed by economists at the University of Chicago, discussed a widely cited paper he co-authored, based on a field experiment that connected randomly selected households to the grid in rural Kenya. The households in the study with an electricity connection actually seemed no better off than those that weren’t connected. The team concluded that electricity access is only useful if people have ways to use the energy – and there were not many ways for the Kenyans in the study to do so. The study is also discussed in the EEG State of Knowledge paper Electrification and Economic Development: A Microeconomic Perspective, co-authored by Kenneth Lee.

Dr Maarten Voors, associate professor at the Development Economics Group, Wageningen University, and principal investigator on an EEG-funded project on electricity and productivity, shared insights from research undertaken in Sierra Leone. He discussed a large study carried out on the impact of electrification (through solar mini grids) on rural health clinics and the wider community. While there have been a few promising signs in clinics – such as increased investment in cold storage – there haven’t been any changes in terms of opening hours or additional services, meaning that electrification hasn’t yet translated into an increase in the number of people being treated. And while more households have started to obtain electricity connections, and have moved away from charcoal and firewood, electrification hasn’t translated into improved incomes or food security, or reduced poverty. More businesses are also using electricity, but, in the short-term, it hasn’t changed their inputs or outputs, turnover or profits.

Both Kenneth and Maarten, and the other panellists, stressed the importance of unlocking the productive benefits of electrification to enable people to do more with electricity. Combining electrification with complementarities, such as access to appliances, appliance subsidies, infrastructure investments and access/closer proximity to markets was discussed. Electricity is an enabling technology, and research suggests its impact depends on other factors. All panellists agreed that consumers need knowledge, skills and opportunities to be able to use energy and realise the benefits.  

The reliability of electricity services also has an important role to play. Households and businesses need high-quality connections, and if the quality of grid construction and infrastructure, and maintenance programmes, are low, this can impact reliability, and thus utilisation.

During the webinar, we also considered two pieces of research that have detected a more positive correlation between access to electricity and economic development. Dr Dana Kassem, a researcher at the Department of Economics, University of Mannheim, researched the impact of grid expansion on industrial development in Java, Indonesia, and, in contrast, found there was a positive effect on manufacturing. There was an improvement in firm entry rather than improvements in firms that already existed; as locations became electrified, they became more attractive to entrepreneurs. The creation of new firms resulted in more manufacturing outputs, more people working in the sector and a more competitive environment.

Dr Robyn Meeks, assistant professor at the Sanford School of Public Policy at Duke University, explained that in a study on rural electrification in Nepal, a substantial increase in formal manufacturing establishments has similarly been seen, albeit the baseline numbers were low. Before electrification, approximately one in five villages in the sample had manufacturing establishments with 10 or more employees – the research team estimates that after electrification (through micro-hydro mini grids), it’s risen to about one in three. It is thought that smaller and informal firms could have also increased, but this was not captured by the research. A shift from self-employment and agricultural work to working for salaries/wages was also witnessed, thought to be driven by manufacturing establishments and smaller and informal businesses.

When discussing the different results, it was suggested that some studies might be seeing only a short-term picture, with the benefits potentially growing over time. It was also thought that the varying research methods (randomised controlled trials versus observational studies for example) might also play a part.

Professor Clark Miller, a professor in the School for the Future of Innovation in Society and director of the Center for Energy & Society, Arizona State University, and principal investigator on an EEG-funded project on energy infrastructure investments in Sierra Leone, is taking an analytical approach to try to explain the differences in economic outcomes.  

Clark explained the importance of designing energy projects in relation to the users’ ability to use energy to create value in their own lives – which he calls the social value of energy access. It might occur differently in different places, and might be productive, commercial or industrial, or more focused on improving people’s capabilities to do things that create wellbeing and opportunities to thrive. Paying close attention to system design is also important for ensuring that energy systems are creating more value than they extract. All energy systems impose costs, risks, fees and burdens on users and communities, which can erode wellbeing over time, especially in extremely low-income communities.

It is clear from the webinar discussions that businesses and communities need the capability to use electricity if social and economic benefits are to be returned. Furthermore, energy systems are expensive to build – and must generate revenue from consumers in order to encourage further investment and expansion, and to fund essential maintenance and repair work. It is essential that we continue to question through research what action can be taken to ensure electricity access promotes economic growth.

Watch the webinar, the first in a series that will explore the emerging body of evidence from the EEG research programme, here.

By Simon Trace