The economic impacts of investing in rural electrification in Ghana

Ending energy poverty is recognised by Sustainable Development Goal (SDG) 7. In Ghana, significant progress in extending electricity access across the country has been made, particularly in rural areas where access levels rose from 1% to 63% of the population between 1991 and 2014. However, evidence on the economic benefits of rural electrification projects remains empirically unexamined (Lee et al., 2016).

A profitable investment?

To stimulate further capital investments, strong evidence on the benefits of the National Electrification Scheme (NES) is required in negotiating private sector participation, development partners’ support, and government budget allocations (Ministry of Energy, 2010). These infrastructural investments will be required to improve electricity penetration into rural areas and electricity access for rural households to achieve universal access by the year 2020.

The study: The income and welfare impacts of rural electrification in Ghana

To quantify the income and welfare benefits of rural electrification, we combined two geographically referenced datasets:

1. The Ghana Living Standards Survey (GLSS) rounds 5 (2005/06) and 6 (2012/2013): A nationally representative household survey.
2. Data on electricity connections of communities in Ghana and their associated Global Positioning System (GPS) coordinates.

The data were obtained from the Ghana Statistical Services, Ghana Ministry of Energy, and the Electricity Company of Ghana, between 2005 and 2013. The GLSS dataset and information on grid-connected communities together with the household characteristics allowed for an estimate to be made of the impacts of rural electrification on income and welfare outcomes.

The findings:

• Income: Electricity access is found to improve the gross income of households compared to households without access.
• Welfare: Measured by real household expenditure per capita, we found that expenditure is about 63.7% higher for households in rural communities connected to the national grid compared to rural households living in areas without a grid connection.
• Distributional impacts: Access to electricity improves the incomes of relatively high-income households more than low-income households. This result implies that:

1. Electricity access improves the gross income of all households, irrespective of the initial level of income at the time they are exposed to electricity.
2. High-income households benefit relatively more from electricity access compared to poorer households.

Thus, access to electricity has the potential to widen the income gap among rural populations, and to reduce the income gap between urban and rural households. These results are consistent with some studies from Benin, Uganda, South Africa and India (Toman, 2017) but are contrary to a number of other studies in Rwanda (Lenz, 2017) and Tanzania (Chaplin, 2017).

Pathways of impact on income and welfare:

There are many potential channels through which rural electrification will have an impact on the income and welfare of households. Our study indicates that ownership of non-agricultural enterprises and educational attainment are two important pathways through which access to electricity improves the economic welfare of rural households in Ghana.

1. Ownership of non-agricultural enterprises pathway

Access to electricity enables the modernisation of agriculture (e.g. the use of electric pumps for irrigation) and the reallocation of working hours, which can raise earnings and improve welfare (Dasso, 2015). The modernisation of agriculture and extended business hours can provide increased employment opportunities to electrified communities, which can affect welfare.

We found that rural households with electricity that own a non-agricultural enterprise and the income from non-agricultural enterprises is likely to be about 4.7% and 52.4% higher in comparison with similar households in communities without access to electricity.

Thus, the establishment and operation of non-agricultural enterprises provides an important pathway through which rural electrification affects the income and welfare of rural households in Ghana. In the case of earlier studies in Rwanda, Benin, and Uganda, there are no impacts on firm creation or non-agricultural employment (Toman, 2017).

2. Education attainment pathway

Some existing evidence from Peru (Dasso, 2015), Northern El Salvador (Barron, 2014), and Bangladesh (Samad, 2013) show that access to electricity increases study hours for electrified communities leading to improved educational attainment, higher earnings, and a reduction in poverty in the long run.

The study supports this evidence in the case of Ghana. Schooling years (representing educational attainment) is about half-a-year higher, on average, among members of rural households with electricity compared to rural households without electricity.

Even though the study does not directly attribute the differences in income and welfare between households with access and those without access to education. However, the effect of education on income and welfare will be realised in the long-run.

Policy implications

There is clear evidence that rural electrification in Ghana improves the income and welfare of rural households. Therefore, there is economic justification for investment in rural electrification in Ghana. By extending electricity to the economically-vulnerable (powerless), there is a potential for speeding the development of rural enterprises, which can lift people out of poverty.

Government can realise the benefits of rural electrification in reducing poverty and unemployment by establishing agriculture–support enterprises or factories (cottage industries) in rural areas that have been electrified. This will contribute to the modernisation of agriculture, by allowing for the use of mechanised practices.

Moreover, enterprise development programmes should be designed to encourage individual end-users in rural communities to utilise electricity productively through incentives such as subsidising the costs of connection and appliances (Lee, 2016).

References

Barron, M. and Torero, M. (2014). Electrification and Time Allocation: Experimental Evidence from Northern El Salvador, Department of Economics, UC Santa Cruz., International Food Policy Research Institution – IFPRI, Munich Personal RePEc Archive. Accessible: https://mpra.ub.uni-muenchen.de/63782/1/MPRA_paper_63782.pdf

Chaplin, D. et al. (2017). Grid Electricity Expansion in Tanzania by MCC: Findings from a Rigorous Impact Evaluation, Final Report, Publisher: Washington, DC: Mathematica Policy Research. Accessible: https://www.mathematica-mpr.com/our-publications-and-findings/publications/grid-electricity-expansion-in-tanzania-by-mcc-findings-from-a-rigorous-impact-evaluation

Dasso, R. and Fernandez, F. (2015). The effects of electrification on employment in rural Peru, IZA Journal of Labor & Development, Springer. Accessible: https://doi.org/10.1186/s40175-015-0028-4

Lee, K. et al. (2016). Electrification for “Under Grid” households in Rural Kenya, Development Engineering, Volume 1, June 2016, Pages 26-35. Accessible: https://doi.org/10.1016/j.deveng.2015.12.001

Lenz, L. et al. (2017). Does Large-Scale Infrastructure Investment Alleviate Poverty? Impacts of Rwanda’s Electricity Access Roll-Out Program, World Development, Volume 89, January 2017, Pages 88-110. Accessible: https://doi.org/10.1016/j.worlddev.2016.08.003

Ministry of Energy (2010). National Electrification Scheme (NES): Master Plan Review (2011-2020), Draft Report, Volume 1 of 12, Main Report, Arthur Energy Advisors. Accessible: http://www.mida.gov.gh/pages/view/NES_Master_Plan_Review_Executive_Summary_Main_Report.pdf/111

Samad, H. et al. (2013). The Benefits of Solar Home Systems: An Analysis from Bangladesh, Policy Research, Working Paper 6724, the World Bank, Development Research Group, Agriculture and Rural Development Team. Accessible: https://openknowledge.worldbank.org/bitstream/handle/10986/16939/WPS6724.pdf?sequence=1

Toman, M. and Peters, J. (2017). Rural electrification: How much does Sub-Saharan Africa need the grid?, the World Bank. Accessible: http://blogs.worldbank.org/developmenttalk/rural-electrification-how-much-does-sub-saharan-africa-need-grid