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What are the benefits of energy?

November 9, 2016

Energy is an essential pillar of economic development. This appears so obvious, that it seems almost banal to say it. Indeed, few would question the need for increasing access to energy, and UN initiatives such as Sustainable Energy for All have successfully embedded the idea into the Sustainable Development Goals for 2030.

But as soon as we ask ‘how much energy is needed for a country to develop’, we hit a problem. The empirical evidence is surprisingly thin. We know the historical record of 19th Century’s reliance on coal, and the global political struggles of the 20th Century over the oil and gas needed to sustain our energy-intensive economies. But beyond these historical narratives, the analysis proving a causal link between energy access and economic development is largely missing, especially at a micro-economics level. We need to better understand this if we are to develop a forward-looking narrative for the energy story in the 21st Century, and understand what type of support will be needed from policy-makers.

This question is particularly pertinent for countries not already committed to heavy industrialisation pathways. Sub-Saharan Africa together with India and Bangladesh are the new frontier of this debate. New energy business models are emerging to provide energy to households based on micro-credit or pay-as-you-go, enabled by new communication technologies and a precipitous decline in solar energy costs. The financial sector serving this market is still small and niche, but is getting positively frothy at the prospect of serving this huge untapped market.

However, the questions remain; what are the benefits of energy access, and therefore, how much support should be given? Evidence from case-studies and data reported by practitioners and industry bodies show a range of positive socio-economic benefits including health, education, welfare and gender impacts (e.g. IEG 2008, GOGLA 2016, ODI 2016). But academic literature reviews find more mixed results. Whilst the IEG 2014 review supports the case for educational benefits, they find evidence is thin regarding economic, health and gender impacts. A World Bank review also concludes that in the literature there is “a complete lack of agreement concerning the nature of the causal link (if any) between energy and GDP”. Systematic literature reviews by Attigah 2013 and Torero 2014 also show mixed evidence on economic impacts, noting examples of both positive and negative impacts depending on country context and the kind of investment being made. One recent example is in Kenya where the social benefits of grid electrification were found to be smaller than the costs, leading to overall negative social welfare impacts (Lee, 2016). Peters 2015 finds that in the short run at least, energy access in low consumption environments such as rural Sub-Saharan Africa can be as effectively served by low-cost solar alternatives.

This evidence suggests that simply providing higher levels of energy access will not necessarily drive more development if other growth factors are not in place. In some circumstances, basic access will deliver a high proportion of the achievable benefits, whereas in other circumstances, development benefits will only accrue if high-level access is available. This variation in the impact of energy access depends on what binding constraints apply in different circumstances, factors such as income levels, human capital, physical capital, natural resource endowments, technological status etc. Energy access is only one of these constraints, so providing more energy does not necessarily lead to a proportionate increase in development. Getting energy access decisions wrong may lead to huge opportunity costs in terms of inappropriate spending, or delayed benefits.

Research funded by DFID is currently underway to understand the relationship between energy and development for both centralised and decentralised systems. Intuitively it seems likely that causality works in both directions between energy and growth, the classic chicken-and-egg problem. Planning energy systems in this context will require a deeper understanding of the linkages between energy and other growth factors. Energy policy needs to come out of its silo and work towards building coordinated strategies that tackle the SDGs in a holistic way.

Written by William Blyth, SAMI Associate.

The views expressed are those of the author and not necessarily of SAMI Consulting.

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