Power to the poor
Feb 8th 2001.
From The Economist print edition
How market forces can help to meet the energy needs of developing countries
AFTER decades of intensive and expensive efforts to help the “energy poor” in
developing countries, there is little to show for it all. As the World Energy Assessment
(WEA), a joint effort by the United Nations and the World Energy Council, recently
pointed out, “The current energy system is not sufficiently reliable or affordable to
support widespread economic growth. The productivity of one-third of the world’s people
is compromised by lack of access to commercial energy, and perhaps another third suffer
economic hardship and insecurity due to unreliable energy supplies.”
That is clearly a big problem for poor countries. Increasingly, though, energy poverty is a
matter of concern for rich countries, too, and it is in their interest to help establish a
sustainable energy future for all the world’s inhabitants.
If nothing else, they might feel a moral obligation. Development experts estimate that
some 2 billion people, chiefly in the rural areas of poor countries, lack access to
electricity. But the IEA thinks that the real number may be considerably higher, because
“access to electricity” is often defined as a grid extension to a village, when in many
villages only a handful of people actually have access to that power. In urban areas, too,
the high cost of connection prevents many households from gaining safe access to
This does not mean, of course, that they do not use energy, but that they use it in its least
convenient forms—eg, charcoal, crop residues, cow dung—and usually in ways that are
damaging to both human health and the environment. Such inferior fuels make up
perhaps a quarter of the world’s total energy consumption, and three-quarters of all energy used by households in developing countries.
According to a recent analysis by Richard Ackermann of the World Bank, the costs of
using inferior fuels can be staggering: he found that the urban areas of China alone lose
some 20% of potential economic output because of the effect on human health of dirty
energy use. In India, indoor air pollution from dirty fuels causes as many as 2m
premature deaths a year, particularly among women and girls, who do most of the
But altruism apart, the rich world also has a solid commercial motive for caring about the
poor. The developing countries’ voracious appetite for energy will soon have a huge
effect on the availability and cleanliness of the stuff the world over, and perhaps even on
the stability of energy markets. Energy consumption in the rich world, both in absolute
terms and on a per-head basis, has always dwarfed that in poor countries, but in the next
few decades developing economies, especially India’s and China’s, will start to catch up.
The IEA reckons that two-thirds of the increase in energy demand between 1997 and
2020 will come from poorer countries (see chart 6). If China and India rely heavily on
antiquated technology to produce power from their plentiful local supplies of coal, they
will surpass even the United States as the leading emitters of carbon dioxide within decades, negating any efforts by rich countries to curb global warming. Unless rich countries help poor ones leapfrog to greener technologies, the world could soon become a nastier place for everybody to live in.
Fortunately, there are several reasons to think that the future for the world’s energy poor need not be as bleak as the past. One is the liberalisation of energy markets. Another, related one is the shift away from grandiose energy projects supported by international financial institutions and aid donors. The most powerful one, though, may be grass-roots activism in poor countries. Taken together, these forces suggest that the command-and-control, fossil-fuel-based power grid may be superseded in future by a nimbler, more decentralised and cleaner energy infrastructure that is more likely to serve the needs of the poor.
The liberalisation of electricity markets now in progress in many developing countries is likely to make a big difference. Market-minded technocrats in many Latin American economies have encouraged competition in both the generation and the retail distribution of power. Argentina has also privatised YPF, its state-run oil giant, and even allowed its takeover by Repsol of Spain, its former colonial master. China has partially privatised its big oil companies. Indian states are now reforming power distribution in an effort to stop the large-scale pilferage and waste of power.
With a few exceptions (mainly China), all this may mean the death of the gigantic power project. In the past, central planners have lavished vast sums on building dams, and both nuclear and coal-fired power plants. Such projects were usually completed late and well over budget, had a much greater social impact than expected and turned out to be far less efficient than promised.
The introduction of market reforms in the production and delivery of power has injected a strong dose of reality. Most of the money for new power projects in developing countries now comes from the private sector, so projects must be financed on commercial terms—
and energy investors increasingly favour small, efficient power plants fired by natural gas or other forms of distributed generation.
Liberalisation is also bringing down subsidies for fossil fuels, which will favour clean forms of distributed generation. This matters in rich countries, too, but the bias in favour of dirty energy sources is greater in many poor countries.
The view from below
However, the best reason to think that a happier energy future awaits the world’s poor comes from the grass roots. Contrary to conventional wisdom, people in poor countries do care about greenery and cleaner energy, and are prepared to pay for it. Local activists all over the developing world, encouraged by like-minded people in the rich world and linked by the Internet, are clamouring for less pollution.
To make this possible, those people will have to be helped to climb up what the WEA calls “the energy ladder”: from simple biomass fuels to convenient, efficient fuels (usually liquid or gaseous) for cooking and heating, and to electricity for most other uses.
But decades of experience show that governments alone, however generous or well-intentioned, cannot do the job without the market.
“The developing world is just littered with examples of energy projects that have failed because donors or governments did not think about how they will be maintained and paid for,” explains Christine Eibs Singer of E&Co, a charity that finances renewable energy.
The key to sustainability, she argues, lies in helping local entrepreneurs create markets for the energy services that the poor actually need and are willing to pay for, rather than what distant bureaucrats think is appropriate.
It is a widespread misconception that the poor cannot or will not pay for energy. The World Bank thinks that of the 2 billion people currently without access to modern energy, perhaps half are able to pay commercial rates for electricity; the remaining billion, reckons the agency, will need some government subsidy. Other estimates suggest that only 5-10% of those 2 billion people can afford to pay commercial rates for power, and that another 15% could probably afford to do so if credit were provided. But even these more conservative sums add up to a market of 300m-400m households.
Market-driven policies, topped up with targeted subsidies, should be able to reach many of the 1.3 billion people living in what economists call absolute poverty, with incomes of less than a dollar a day. According to development experts, households are usually willing to spend about a tenth of their monthly income on energy, including cooking fuel. Even for those in absolute poverty, who typically have a household income of $40-60 a month, that would amount to $4-6 a month. Ms Eibs Singer insists that “clean energy
services could be provided for this amount on a market-driven basis, especially if you can target government programmes and subsidies at this level.”
There is ample evidence that the poor do pay, often heavily, for inefficient, dirty energy—say, from kerosene, candle wax and batteries. Indeed, they often pay more per
kilowatt than do middle-class, urban households or wealthy farmers who benefit from heavily subsidised grid electricity. For example, families in Peru’s remote highlands on average spend about $4 a month on candles. For a bit more, they could afford the much higher-quality power offered by village power units: experts say that local entrepreneurs can turn a profit by leasing out a small, 35-watt solar unit, enough to power two bulbs and a radio, for about $80 a year.
In Yemen, dozens of tiny private generators have sprung up to service households not reached by the inadequate grid system. Although these small operators charge quite steep prices, even poor households scrape together the money rather than live in the dark. Electricity penetration in Yemen now tops 50% of households, far higher than in most countries at comparable income levels.
E&Co tries to help locals to help themselves. It invests in start-up enterprises in developing countries that want to deliver clean micropower to villages; it also advises them on how to draw up business plans, sales and distribution strategies and so on. The Tata Energy Research Institute (TERI), an Indian think-tank, uses a similar approach. In villages across India, the group has helped to train local entrepreneurs in setting up marketing chains, arrange decentralised credit and finance, and link the villages with manufacturers of village power units.
To make such schemes work, the user must pay for the services, with targeted subsidies for the very poorest. Experience shows that giving the stuff away causes a massive waste of resources. Economic incentives are also needed for the private sector to maintain and improve those energy services. Local firms have tried various methods, ranging from cash up-front and pre-paid tokens to fee-for-service or leasing. The poor, it turns out, are usually excellent credit risks, though conventional banks in developing countries still refuse to accept this. Innovative microfinance initiatives, such as lending circles, generally see repayment rates of 92% to 98%.
Village power, meet market power
But although markets can indeed help the world’s poorest, they offer no silver bullets. Such successful models as E&Co and TERI are not easy to scale up to the levels of funding that the big donors are used to. All the same, some of those donors are increasingly backing the private sector in its efforts to adopt a market-based approach. The United Nations Foundation’s AREED (African Rural Energy Enterprise
Development) project is helping on two levels: by supporting local enterprises with business development services and seed capital, and by training its local partners in developing countries to apply market principles. Another example is the Renewable Energy and Energy Efficiency Fund, a commercial equity fund sponsored by the International Finance Corporation (the World Bank’s private-sector arm), which provides
the investment-stage capital for renewable energy projects in developing countries. With the help of big western utilities, insurance companies and banks, the fund has raised some $65m so far to boost renewable energy, with a focus on innovative village power schemes.
Grace Yeneza of Preferred Energy, a Philippine NGO, explains her group’s work in several remote highland villages that had no access to grid electricity. Working with the barangays, or local councils, her group built a micro-hydroelectric plant on the creek separating the villages in order to deliver electricity to their common areas. Donor agencies paid for the equipment, but the villagers pitched in “equity” in the form of
labour and local materials. They also organised themselves into a management committee to run the plant. Those who want power for their households must pay for it. The project has not only brought power to neglected villages, but co-operation among the villagers on the power project has also ended long-running squabbles over the local creek. The future for the world’s poor may not be so dark after all.