Access to energy is said to improve health services, positively impact education and facilitate economic growth in communities. However, the question is if this progress truly touches the whole of a community or only a few individuals. This article explores if the economic situation of a few or of an entire village are impacted by access to modern energies. Further, to which extent electrification leads to productive use and increased productivity still remains one of the core interests of development practitioners. Therefore, this article also examines how electrification impacts the individual entrepreneur and the whole business landscape in a community.
Economic Benefits of Energy Access
For a general overview about economic impacts of energy access see:
Fuel savings through the use of Improved Cookstoves (ICS) can impact a household’s income significantly. Households in Sub-Saharan Africa dedicate an average of 7% of their expenditures to lighting and cooking energy. Especially the poor in urban areas are affected since they use high-cost cooking fuels, such as charcoal, for which they have to spend 15-20% of their monthly income (World Bank, 2014). Basic ICS can lead to savings of 20-35% whereas intermediate, mostly industrially produced, ICS allow savings of 35-65% (Adkins et al., 2010; IOB, 2013; World Bank, 2014).
However, the assumption that ICS have a positive effect on fuelwood consumption and ultimately result to savings has been debated. Several cases have been reported where no improvement seems to have taken place. For example, a study carried out in Benin on the impact of ICS concluded that households that frequently used an ICS for cooking merely saved around 12% on fuelwood. Further, they claimed that no significant savings were observed for households that were constantly using an ICS in combination with another stove. Also, it was observed that families cooking with ICS tend to cook more often, thus offsetting the potential savings (Bensch et al., 2013). Other reasons for no impact on savings could be improper use, heat of the traditional fire place is missed, keeping the improved stove running all day since it is more comfortable, use of traditional and improved stoves simultaneously (IOB, 2013).
Solar cookers allow savings on fuel expenses of 10-40% and Biogas cookers 66-80%. These technologies are obviously the best when it comes to emissions, however adoption has always been a great issue and thus, the percentage of households using these technologies is fractional (World Bank, 2014).
The wide range of ICS models offers affordable solutions for all income levels; thus, the scenario of entire communities being equipped with energy efficient stoves is possible and already exists. According to the observations however, overall betterment of the economic situation of an entire community through ICS remains questionable. Savings made through ICS do not seem as considerable as to have impact on the entire economic setting of a village or community. As for the economic impact on the individual several studies claim no significant savings can be observed and it is very dependent on their user behaviour.
PicoPV and Solar Home Systems
PicoPV can reduce the expenses substantially for lighting and communication technologies where initially kerosene lamps, candles or torches were commonly used. Running fuel-based lighting such as kerosene lamps and candles costs up to 150 times more than premium-efficiency fluorescent lighting (Reiche et al., 2010). Thus, PicoPV allows poor households to cut a significant amount of costs relative to their income. Further benefits where the use of PicoPV lanterns and batteries enhance economic growth are:
- better lighting conditions for studying
- improved lighting conditions for income generating activities
- use of communication technologies (mobile phone, radio) to acquire market information, for education or social coherence
(Reiche et al., 2010)
Solar Home Systems (SHS) as well, have the potential to decrease the lighting expenditures for households initially using fuel-based lighting, in this manner improving the household’s economic situation (Obeng et al., 2008). However, the households owning SHS in rural areas are normally better-off families (Gustavsson, 2007).
Affordability of the product plays a significant role when assessing if energy access through solar technologies impacts the economic growth of a community. As described earlier, in cases where only SHS are available for a community few individuals – the wealthy households – are mainly the ones that can afford them and may benefit economically from access to energy. Areas where affordable PicoPV lanterns and batteries are available as well, improvement of the economic situation can expand throughout the whole community and does not only touch the better-off.
Grid or Mini-Grid Connection
In an electrified Rwandan village after the installation of micro hydro mini-grids the expenditures for energy per working-adult increased substantially. Reasons for that however, were the energy consumption in the electrified villages being higher in the first place and second the energy use increasing significantly (e.g. watching TV) after the connection. Which leads to the assumption that ultimately the economic situation of the electrified households is downgraded. Yet, another reason for high energy consumption in this case was that the electrified homesteads tended to be wealthy, thus consuming a lot in the first place (Bensch et al., 2011). Matinga and Annegarn warn that electrification will not benefit all households – especially not the non-rich – of a community without complementary measures such as providing financial schemes and business training. Further, they claim that the impacts of energy access are not equally experienced nor does it deliver wholly beneficial development effects. (Matinga and Annegarn, 2013).
The tariff design of mini-grids plays a crucial role in how well a community and in particular poorer households can benefit economically from energy access. Most tariffs can be divided into three main categories:
- Energy based tariffs: depend on the actual energy consumption
- Power based tariffs: based on the maximum power available to the customers
- Fee-for-service tariffs: based on services provided, e.g. price per 1-hour TV service or light (Franz et al., 2014)
With the wrong tariff design poorer households might find themselves having to pay more than they are capable of. Cross-subsidy tariff schemes on the other hand, can avoid this situation. In this tariff design lower tariffs are charged for the first kilowatt-hours and higher tariffs for additional consumption. Very common in this type of design is a lifeline tariff, a subsidised tariff which provides basic electricity needs (Franz et al., 2014).
In case of electrification of a community or village connection fees are the first obstacle to overcome. Wealthier households are more likely to raise the money for connection (Bensch et al., 2011). This is another argument that electrification does not benefit the whole community but only the rich. Yet, Peters (2009) claims that it cannot be resolved if a household is electrified because it has a higher income or if it has a higher income because it is electrified (Peters, 2009).
Khandker et al. showed that income of households that had been using electricity for a long time increased faster than the income of non-users. However, they too claimed that rural electrification is necessary but on its own not sufficient to improve local economy (Khandker et al., 2009).
These findings strongly suggest that mainly wealthier households of a community benefit from electrification. Further increasing their economic situation and leaving the poor behind. The consensus is that in case of first-time electrification assistance is necessary to ensure a positive impact for as many community members as possible.
Access to electricity has been linked to improved productivity, enterprise creation and increased employment. Nevertheless, the impacts are said to be relatively small (“Utilising Electricity Access for Poverty Reduction | Practical Action Consulting | Practical Action,” 2015).
However, electrification may not always have positive outcomes for all when it comes to productive use of electricity. In Benin, a study showed that connection to the grid does not necessarily equal improved performance. Small firms are exposed to higher investment and operating costs while their turnover remains the same. This is due to the fact that they acquire the connection without developing business plans on how to carry the investment of electrical appliances and rather want to be electrified for convenience reasons such as lighting (IOB, 2013; Peters et al., 2011). Also, in the majority of cases local market demand is already saturated, thus there simply is no opportunity for business uptake (Dijk, 2008; Kooijman-van Dijk and Clancy, 2010). Furthermore, a study examining the impact of electrification on fishing communities in Uganda did not find any significant differences between electrified and non-electrified communities regarding the firm profits or remuneration of workers (Neelsen and Peters, 2011).
The firms that do benefit the most are the newly established ones that are electricity-dependent and who ultimately provide employment and generate income (IOB, 2013).
Several researchers recommend complementary services in addition to electrification. Firms must be sensitised about the implications of a grid connection and must be assisted to ensure a positive economic impact (Matinga and Annegarn, 2013; Peters et al., 2011; World Bank, 2008).
Regarding enterprises in newly electrified settings, it can be concluded that the positive impact on their economic situation is limited. Depending on how dependent the they are on electricity and how business-oriented/savvy they operate. Newly established enterprises that entirely rely on electricity access may have the potential to improve the general/overall economic situation and enabling business environment of a community through the provision of new communication and finance services.
The following Table 1 gives an overview of the economic impacts on individuals and on the community resulting from energy access sorted by technology. Though the main positive impact derives from savings on fuel for lighting or cooking.
Table 1: Economic impacts on individuals and community by energy access.
Energy access seems to mainly benefit the economic situations of individuals and rarely improve the economic situation of a community as a whole. The economic impact of most cooking technologies and simple lighting devices in general has been questioned throughout the literature. It was observed that user behaviour has a great effect on the amount of savings and thus, relative money saved can be fractional.
Interestingly, several cases showed that energy access tends to benefit primarily the wealthy and improve their economic growth even more. This drastically increases the gap between rich and poor within a community and may spawn tensions within a society. This scenario also applies to enterprises. Poorer firms that cannot afford electricity are outpaced by firms who can. Further, enterprises that invest in electrification and electrical appliances without an efficient business plan most likely will not increase turnover to cover the higher expenses since the market conditions in the area remain the same.
Ideally, a community can collectively benefit from energy access if everyone has affordable access to it and is aware of a responsible and efficient consumption. This can be enabled by suitable tariff designs. In addition, researchers recommend the supply of assistive measures for productive use and on household level (business plan development, efficient energy use, financial services) by government, utilities and private sector in addition to electrification to guarantee growth for as many as possible.
Further research is necessary to disclose if positive impact of energy access on a few extends to the others of a newly electrified community. For example, through an increase of disposable income of a few, resulting to an increased demand for goods and services in the region. For example, economic growth of the wealthy households can lead to more house helps, cooks or caretakers being employed. More frequent and larger family gatherings which need catering, chairs, decoration. Increased spending in local kiosks, bars and restaurants.
Only long-term studies could reveal these secondary impacts on the economic situation of a community. Examining the consumption habits and leisure activities of the better-off over time as well as changes in the customer base and turnover of local businesses and services providers may lead to insightful findings.
Lastly, the question remains if there is a way to provide energy access that benefits all equally.
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