by Fiona Burlig and Louis Preonas
Context
Nearly 1 billion people still lack access to electricity. The vast majority of these people live in rural South Asia and sub-Saharan Africa. Because electrification is widely believed to help alleviate poverty and spur economic growth, developing countries have made large investments in efforts to expand their grid to rural, poor communities. In fact, expanding energy infrastructure to everyone on the planet by 2030 is one of 17 global sustainable development goals set by the United Nations. However, while there is evidence that electricity access increases Gross Domestic Product (GDP) at the national level, there is limited evidence that bringing power to rural villages—a scale more representative of today’s electrification efforts—results in any economic gains.
Research Design
The study estimates the economic impacts of electrification in the context of India’s massive national rural electrification program, Rajiv Gandhi Grameen Vidyutikaran Yojana. The program was launched in 2005 to expand both domestic and commercial electricity access in more than 400,000 rural villages across 27 Indian states. India is a useful setting for studying ongoing rural electrification efforts, as more than 80 percent of new household grid connections globally occurred in India between 2000 and 2016. Moreover, India’s per-capita income during the rural electrification program’s period was similar to income levels in countries with significant unelectrified populations today.
India’s program made villages with 300 or more inhabitants eligible for electrification, and villages with fewer than 300 people ineligible. The program also had a staggered rollout, with some districts receiving grid access during a first wave, and others during a second wave. The researchers used these rules to conduct a natural experiment, comparing villages just large enough to be eligible for electricity access with those just too small to be eligible, as well as comparing villages before and after electrification. They obtained their electrification data from both administrative sources and satellite imaging of nighttime brightness, which serves as a proxy for electricity consumption.
Findings
India’s rural electrification program led to substantial increases in electricity access among eligible villages.
The researchers found that India’s national rural electrification program provided commercial power to 1 in 13 small villages (just about 300 people) that previously lacked access, and 1 in 7 previously unconnected rural households. Overall, the program caused a 14 percent increase in household grid connections, an 8 percent increase in electric lighting, and an 11 percent increase in electric fan adoption, but no increases in other, more expensive, household appliances.
With an increase in electrification, considerable economic improvement is seen in larger villages – likely due to business growth – while impacts in small villages are limited.
Villages of about 300 people or smaller did not experience much economic improvement from the introduction of grid electrification. In fact, per-capita monthly expenditure barely changed. However, larger villages (about 2,000 people), could have experienced a doubling of per-capita expenditure due to full electrification, an increase of about Rs 1,428 (about $17) per month. This may be due to structural transformation in these larger villages, as electrification caused firms to grow. In these larger villages, the researchers find a 10 percent increase in the number of firms and 9 percent increase in the number of firm employees. This suggests that large villages were able to reap the benefits of expanded electricity access by shifting production into firms, whereas this did not occur in smaller villages.
Scale is critical: Benefits received from electrification in larger communities outweigh the costs of electrifying the village.
In computing the 20-year internal rate of return from rural electrification, the researchers find that the smaller 300-person villages experience zero return from electrification after 20 years and full electrification has less than a 27 percent chance of generating economic benefits that exceed upfront costs. The 1,000-person villages experience a 13 percent return, just barely exceeding the benchmark for cost effectiveness. But as the village size increases to 2,000 people, there is a 33 percent return, far exceeding the cost-effectiveness benchmark. These villages have a 90 percent change of generating economic benefits that exceed upfront costs. The gap in the return on investment between small and large villages suggests that electrification was more effective at creating new income-generating opportunities in larger communities.
Closing Take-Away
The study suggests that policymakers looking to improve the welfare of citizens should target electrification efforts towards larger rural communities that would experience the greatest economic gains from these investments. This is because not only are there high costs of providing grid infrastructure to remote, sparsely populated areas, but these communities may not be able to translate these improvements into meaningful economic gains.