Productive Use of Electricity

Productive use of electricity is the basis for positive economic impacts of rural electrification programs. The following article will focus on a working definition of the term ‘productive use’, explore the reasoning for the promotion of productive uses through governments or donor agencies and give an overview on potential interventions to support productive uses.

Defining Productive Use of Electricity

In the general discussion there have been several attempts to come up with a clear definition of the term ‘productive use’. While in some cases productive use is mainly defined through income generating activities that are directly positively affected by the use of electricity, others draw a much broader definition by including the use of electric energy for education and health or other welfare related activities.

A World Bank paper by Kamal Kapadia defines productive uses of energy as activities “that involve the utilization of energy – both electric, and non-electric energy in the forms of heat, or mechanical energy - for activities that enhance income and welfare. These activities are typically in the sectors of agriculture, rural enterprise, health and education. Examples of such activities are pumping water for agriculture, agro-processing, lighting, information and communications, and vaccine refrigeration”.

In a publication by Jose Etcheverry the term productive use is defined as referring “broadly to projects that aim at enhancing income generation opportunities and productivity in rural areas (e.g. small industry, agriculture, commercial activities, telecommunications, education and health facilities, clean water, refrigeration, etc.), to improve quality of life and increase local resilience and self-reliance”.

Following Ron White's paper from the GEF-FAO Workshop on Productive Uses of Renewable Energy (2003: 33) a productive use of energy is defined as “one that involves the application of energy derived mainly from renewable resources to create goods and/or services either directly or indirectly for the production of income or value. The production of income or value is understood to be achieved by selling products or services at greater than their cost of production, resulting in an increase in the net income of the enterprise or the entrepreneur”.

Why Support Productive Use of Electricity?

In a 1995 review of the World Bank’s rural electrification projects in Asia, the Bank’s Operations Evaluation Department concluded that the “economic returns of rural electrification projects have been considerably lower than expected and a wide range of expected indirect and external benefits have not materialized”. One reason for this fact is that most rural electrification initiatives in the past have mainly focused on household and community needs for lighting. Placing rural electrification as part of a broader development approach, however, entails allocating a much higher priority on strategies for using energy for productive uses.

The GEF-FAO Workshop on Productive Uses of Renewable Energy in 2002 therefore recommended going beyond home lighting applications: “Many rural renewable energy development projects have primarily focused on household lighting using solar home systems (SHS). While such systems provide important social benefits and also may facilitate homebased income generating activities, there are a wide variety of productive-use benefits that can only be captured through applications other than home lighting. These other applications have been neglected in historical development practice”.

A recent paper by ESMAP argues that the most efficient way to deliver effective and lasting impacts when designing a rural electrification scheme is to ensure that such programs provide a direct impact on livelihoods and revenue generation, in addition to the more conventional impacts on standards of living. Increasing revenue generation can be accomplished by improving productivity of an existing production process and by creating new lines of activities that will generate employment and local demand.

The main reasons for demanding increased promotion of productive uses in energy projects are:

• Productive use can maximize the economic and social benefits of energy access. Energy projects with productive use components are more likely to lead to rural economic development than projects that simply focus on the provision of electricity, or other forms of energy.
• Energy that is used productively can facilitate the achievements of the Millennium Development Goals. Incorporating a ‘productive use’ focus into energy projects makes them more likely to help achieve the Millennium Development Goals.
• Rural electrification projects with a productive use component are more likely to achieve economic sustainability. This is for two distinct reasons:

1. Obtaining financing for Renewable Energy Technologies (RET) may be easier as rural financing agencies might be more willing to provide lending to households that use the provided energy to increase their income.
2. As people’s incomes rise through the productive use of energy, their demand for energy services is likely to rise too. This creates attractive market conditions for RET dealers and vendors.

How to Support Productive Use of Electricity?

Experience from past rural electrification programs has shown that the provision of electricity alone does not necessarily lead to its productive application. There are several reasons why electricity may not be used for productive purposes or small business development. FISHBEIN (2003) summarizes the most important preconditions for productive applications of electric energy in developing countries:

• Knowledge and skill by small and micro-business, households and farmers on how to use new-found electrical and motive power for profitable enterprise.
• Technical and financial management capacity of small and micro-business, households and farmers, including availability of credit and micro-credit to finance productive tools and equipment.
• A policy and institutional environment conducive to business development, willingness to promote decentralized services, etc.
• Access to markets for additional or new products produced or services offered as a result of new electrical, heat or motive power
• Availability of a minimum of other complementary infrastructure services, such as transport, water supply and ICT services.

Where one or several of these factors are nonexistent, productive use of electricity may be hampered significantly. Programs promoting the productive application of electricity are concentrating on providing the preconditions mentioned above by implementing activities such as providing

• productive technologies,
• micro credit,
• Business Development Services (BDS) and training,
• infrastructure, or improved market access (ALLERDICE/ROGERS 2000, VEIT 2006).

Previous experience has shown that activities to promote productive use necessarily seem to involve non-energy sector agencies or organizations to implement respective business development, financing and infrastructure services (KAPADIA 2004).