Firms or Families? Another installment in the Mission 300 electrification debate
On the politics and logics of policy tradeoffs
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I: Policymaking is fundamentally about balancing tradeoffs and setting clear goals, but can African policymakers have it all when it comes to electrification?
I love well-reasoned policy debates. Which is why I’m delighted that the debate on whether African policymakers should prioritize electrifying households or firms as part of Mission 300 goes on. Moussa Blimpo, an economist at Toronto University, crystallized the contours of the debate on the Afronomics podcast with the World Bank’s Africa Region Chief EconomistAndrew Debalen. Blimpo was squarely on team Prioritize Firms. Todd Moss over at Eat More Electrons, yours truly, and David Pilling in the Financial Times followed up with supportive responses.
Wale Aboyade, of Sun King Inc., then wrote a very thoughtful rejoinder, making a strong case for the idea that African countries can and should focus on both firms and households as part of their ongoing electrification push (including as part of the Mission 300 initiative).
Notice that Aboyade’s argument calls for a focus on both firms and families. I am yet to see any strong arguments out there for only focusing on households — an important lesson that African governments, the African Development Bank, and World Bank should take to heart.
As I see it, the case for focusing on both households and firms as part of the big push to increase electrification under Mission 300 has four components.
1) First, the nature of African economies is such that the distinction between firms and households isn’t always clear.
High rates of informality and micro-entrepreneurship mean that the typical salon, welding shop, posho mill, or car wash are often extensions of the household. Indeed, many of these businesses seldom register as such when applying for connectivity and therefore operate as household customers from the perspective of utilities.
For example, Kenya’s public utility, the Kenya Power and Lighting Company (KPLC) has about 450,000 business customers out of its total base of almost 10 million connections. Meanwhile, the Kenya National Bureau of Statistics reports over 7.4m SMEs (only 21% of which are formally licensed). For perspective, about 15m Kenyans rely on SMEs for employment. Obviously not every business needs to have a unique connection. Office blocks and malls can have one connector while housing multiple businesses. However, it’s also true that the vast majority of Kenya’s SMEs don’t operate within such premises. Many either don’t have power or operate using household connections. Therefore, powering households also means powering a non-trivial share of SMEs that are currently not connected to the grid.
2) Second, one could argue that connecting households can contribute to long-term economic growth and development.
Principal channels linking electrification to growth and development are (i) enabling human capital development; and (ii) better integration into the modern economy (and therefore catalyzing higher productivity). As Aboyade argues:
Basic electricity access is not a silver bullet for productivity, but it is a powerful catalyst for human capital development. Reliable lighting extends the productive day, allowing students to study after dark and improving literacy. Power for communication devices connects people to markets, farming techniques, and digital services. Small appliances such as fans and refrigerators enable micro-enterprises and improve health and well-being. Without basic electricity, rural households are harder to reach with development programs, harder to transact with, and more vulnerable to the cycle of poverty. Leaving poor rural households unconnected to modern energy services effectively sidelines up to half of Africa’s population from benefiting AND contributing meaningfully from the continent’s economic growth. This is neither a political or economically smart thing to do.
3) There’s also the matter of speedily getting to 300m new connections by the self-imposed arbitrary deadline of 2030.
The reforms required to accelerate investments in new generation, strengthen grids to increase reliability, support policies that lower costs, et cetera, will take time. Plus there’s no guarantee that African governments will follow through on promises to reform power sectors under the Mission 300 initiative. It’ll simply be much easier and faster to race towards the 300m number with distributed generation capacity, including lots of standalone solar projects. According to Aboyade:
… For Mission 300, the cost and speed advantage of standalone solar is decisive: about 40-45% of connections are expected to come from standalone systems, or roughly 27 million households on average. As the cost of solar panels and batteries contrinue to drop, subsidizing these systems for those who cannot already afford them should not need to cost more than $20-80 per connection, or about $1 - $2 billion in total. That is a tiny fraction of the overall Mission 300 budget, yet it transforms lives and builds a more educated, healthier and productive workforce.
Equally important, standalone solar provides basic energy services at a cost that is lower than existing alternatives such as candles, kerosene, petrol, or diesel. In other words, it does not impose a heavier burden on households or on public finances. This trend will only continue as solar and battery prices continue to fall. Also critical is that servicing households with cheaper standalone power also frees utilities from the burden of serving loss-making customers, and could improve their ability to focus on delivering reliable power to meet the needs of large energy intensive users for whom standalone solar may not be sufficient or competitive in the short term.
4) Finally, one could make the case that it’s possible to deploy parallel electrification strategies targeting firms and households separately.
Admittedly, this argument somewhat contradicts the first one. The idea is that governments could deploy a strategy of rapidly increasing household connectivity through off-grid solutions like standalone solar; while also aggressively investing in expanded base load generation capacity, grid upgrades for reliability, and policy support for lower (and/or more predictable) prices targeted at firms.
In other words, a household-focused electrification initiative need not necessarily detract from governments’ efforts to increase the reliability and affordability of power for firms.
All these are reasonable arguments. However, I would still argue that the bulk of the focus of Mission 300 should be on increasing reliability and affordability of power for firms. On this score, Aboyade and I are on the same page (emphases mine):
[Families] and firms both need power to deliver overall economic transformation. Standalone solar is how we move fast to lift millions households out of darkness and build a productive workforce. Grid power is how we attract and scale industrial growth. Public finance, especially through Mission 300, should recognize this and allocate support accordingly and urgently; a modest share for standalone access and minigrids, and the bulk to drive down costs for industrial power.
These sentiments are reinforced in a recent post by Todd Moss over at Eat More Electrons. Among other things, Moss challenges the World Bank to walk to the talk on its commitment to the electrification of both households and firms. As Moss observes, at the moment the Bank’s reporting mechanism suggests that firm connections and their impacts — especially with regard to job creation — are not being measured (and therefore do not seem to be a priority KPI). Incentives matter. And right now the incentive structure within the Bank is at variance with what its leadership says about electrification and growth.
The Bank’s behavior (reflecting the underlying incentives at the staff level) is a reminder of the danger of assuming that policy entrepreneurs and their implementing agents (in this case, African governments) can multitask. From the Bank’s perspective, it matters what is easily observable and measurable; and it’s staff will always gravitate towards the lower effort and measurable outcomes. In this case, that would be household connections in the race to beat the arbitrary target of 300m (even if the bulk of those are cynical box-checking, one-bulb affairs). On the part of African governments, and with electoral politics in mind, maximizing household connections in visible and attributable fashion will always beat serious consideration of painful reforms or investments in reliable and affordable access for firms. The effects of the latter may not be immediate and are not readily attributable to the actions of politicians. It also does not help that the preferred strategy of increasing power access and consumption (essentially, connections plus micro loans) complements African politicians’ patronage games.
II: Understanding the underlying drivers of low-energy equilibria in African economies
A leading challenge with initiatives like Mission 300 is that they tend to unnecessarily flatten the policy space. Simply put, the power problems on the Continent are complex and vary across countries. Which is why it is important to understand the exact problems that individual African countries should be solving for, rather than getting too hung up on an arbitrary universal target and deadline.
Consider the striking results from a recent survey of 2071 Kenyan SMEs shown above. The survey covered a range of micro, small, and medium enterprises (a 50:30:20 split) with permanent premises (it as an establishment survey). When asked to list leading challenges facing their enterprises, power (both reliability and accessibility) featured a lot lower than I expected.
Why is this so? To be clear, more data is needed to discern exactly what’s going on here. My hunch, though, is that power is low on the priority list for most MSMEs because their production processes/business activities don’t require (that much) electricity. Notice that it’s highly unlikely that these data reflect improvements in the reliability of power supply in Kenya prior to the study. As shown below, power is expensive in Kenya; and the grid remains terribly unreliable for much of the country.
This isn’t to say that MSMEs don’t need power. Rather, it’s a reminder that electrification must be bundled with other policy interventions that improve/modernize firm-level operations — and therefore increase demand via the channel of more intensive energy use.
Yet that’s not what I see when I look at “productive energy use” interventions out there. Nearly all are still mostly micro-entrepreneurship interventions that will exacerbate the top three problems facing MSMEs reported in the survey above.
If we are being honest, many of the interventions are motivated by the ease of measuring short-run impact, rather than an honest effort at modernizing and improving business processes to increase demand for electricity (and create jobs through firm growth while at it).
The whole idea of giving individuals micro grants as a mechanism for increasing productive use of power needs a total rethink. Under that strategy, markets are likely to remain disjointed, there’ll be precious little incentive to scale, capturing gains from innovation will continue to be really, and human capital will be spread thin across mostly low-productivity micro-enterprises. It would be ideal if African policymakers and their development partners focused on a broader modernization effort in the direction of more intensive (and preferably efficient) use of energy and improved business processes — with attention to existing firms.
Notably, the MSME findings above contrast sharply with what we know from surveys of larger firms. For these firms, power prominently features as a top concern precisely because their (modern) operations are energy-intensive.
The complicated story above is not limited to firms. Households, too, need to overcome the low-energy trap. Lighting and perhaps an overhead fan alone are not enough. Moving into the use of appliances like fridges, cookers, water heaters, and other electronics requires both growth that raises incomes and modernization of intra-household processes.
Similar to firms, you are not going to increase energy use at the household level by sprinkling micro grants across low-income communities. What’s needed is a massive step up in average incomes across the board — which comes from broad-based growth powered by growing firms. Indeed, I would go as far as making the (admittedly heroic) argument that firm-level and intra-household intensity of energy use reinforce each other. Overall, it’s highly likely that a household-focused approach to electrification will lock African economies in a low-energy equilibrium well below the 1000Kwh per capita modern energy minimum standard.
III: What should power sector reforms solve for across Africa?
With all this in mind, we can zoom out and think through the factors that are currently holding back power markets in African economies — and which an initiative like Mission 300 ought to prioritize and help address head on. These include reliability, cost, navigating the energy transition, the management of utilities, and pro-growth energy policies/markets at the national and regional levels.
1) Baseload capacity: For the umpteenth time, African economies are atrociously energy poor — a factor that is stalling economic growth and development in the region. Per capita power consumption on the Continent lags the typical American fridge. It follows that ramping up baseload capacity should be a no-brainer — if policymakers can unlock the puzzle of commercial viability. Here, the goal should be for policymakers to aim for generation capacity that guarantees the modern energy minimum 1000Kwh per capita. Period.
Again, not enough people fully appreciate the problem of energy poverty across much of the Continent (and the need to urgently fix the problem):
Even South Africa falls below the world’s average electricity consumption per capita, according to the International Energy Agency. Nigeria ranks among the last 15 countries on the list. The DRC is a few positions lower, with the average Congolese consuming about 1% of what someone in the US uses.
Now, some may argue that creating isolated pockets of mini-grids or standalone solar will solve the problem of not having enough installed capacity. I disagree. As
has convo got argued, African economies need solar firms that feed into grids, and not solar islands (that, in effect, increase the per customer cost of grids). Regardless of energy source, African economies need power generation at scale.2) Grid reliability: Increasing generation capacity in contexts where grids are poorly maintained and can’t handle extra loads doesn’t solve the problem of power access. For example, Nigeria has 14GW of installed generation capacity but has a grid that can barely handle more than 6GW. In the same vein, transmission and distribution losses make up almost 25% of Kenya’s total power output (see figure below for trends). In addition, the grid routinely fails due to load overcapacity. And for all the hype about the Kenyan economy, peak demand is still a paltry 2.4GW (for comparison, this year Vietnam peaked at over 51GW).
In this regard Kenya is a warning about the problems that lie ahead for Africa’s power sectors. Without sufficient investments in grid resiliency, increasing power generation (and importation) will come with increasing grid collapses as well as transmission and distribution losses. At the moment large swathes of Kenya (especially the Western half and the Coastal region) routinely experience load shedding. Notice that Vietnam (see figure) managed to increase power generation while reducing losses related to transmission and distribution.
3) Cost of power: Related to the question of reliability is cost. Simply put, the cost of energy in Africa (including power) is damn too high and must come down. The Continent will not experience sustained economic takeoff under these conditions.
A lot goes into the realized cost of power — from the cost of generation, to grid maintenance, to taxes and levies charged by authorities, to consumers’ purchasing power (subsidized or not), to any back up systems that consumers may need in response to load shedding. The figure below shows a sample of reliability-adjusted costs faced by power consumers. It’s clear from the data that having to invest in back-up systems substantially adds to the cost of power in many African economies.
Which brings us back to the question reliability. Research from Senegal shows that power consumers are willing to pay a premium for reliability. Which makes sense. Not having to worry about generators or other backup systems affords power consumers (whether they are households or firms) much-needed peace of mind. More importantly, increasing reliability boosts consumption despite the price increase.
4) Navigating the energy transition: Despite the vibe shift in Western policy circles regarding climate change, there’s still enough momentum (and a blinding zealotry of converts) on the Continent for naive climate policies to detract from investments in energy abundance. The selection process is also such that the sorts of people who work in international development or wind up representing (European) high-income countries at the World Bank, IMF, and UN bodies are likely to lazily foist their home country policies on energy-poor African economies without consideration of context. African countries must resist both.
Here, the point ought to be to appreciate the nuances of the energy transition in low-energy contexts. Climate change is real, and African economies must embrace energy technologies of the future. At the same time, any and all energy policies must first and foremost be pro-growth (as opposed to merely mimicking policies from high-energy countries). Poverty is not a viable climate strategy. It’s as simple as that.
5) Politics, public utilities, and regional integration: Let’s be blunt, reforms or initiatives that merely seek to bypass African power utilities will fail. At the moment, only a handful of the Continent’s utilities are economically solvent. It follows that fixing the economics of power utilities should be a top priority. In this context, the last thing you want to do is saddle systems with more aid-induced subsidy programs of questionable longevity. What happens when the aid money stops flowing?
I get that it might be good politics (and career boost) for all involved to involved the economics of power access. But sooner or later the music stops and someone has to pick the tab. This isn’t a blanket rejection of subsidies. It is a reminder that such policies must be reality-based and anchored on domestic politics and capabilities.
On this score, policymakers should be bold and think outside the box. For example, the increasing entrenchment of regional power pools opens the door to gradual deepening of regional power markets beyond bilateral deals. Deepening regional power markets (including through the introduction of power exchanges) would inject much-needed private sector efficiencies; provide more market-oriented platforms for cross-country policy coordination (instead of ever more staid inter-governmental organizations); and increase reliability for consumers. The latter point is especially important. Even as policymakers work to increase domestic generation (and therefore reduce prices), there should be a concerted effort to ensure that consumers who are willing to pay a premium for reliability are guaranteed access. And to start, the best way to guarantee that across the Continent is through regional power markets.
IV: Electricity access for growth and development
As I have argued before, Mission 300 is a focal initiative that has the potential to catalyze a step change in how African governments view their electricity policies. However, that will only happen if everyone involved can escape the “yet another aid project that will be used for narrow programmatic/political/careerist ends by multiple key actors but which will ultimately fail to deliver any big picture results” model that currently motivates much of its design and implementation.
It is my firm belief that the biggest impact of Mission 300 will come from pushing policymaking in the sector to ensure that electricity generation and access in the region promote rapid economic growth and job creation. This outcome will only be possible if policies and investments are targeted at guaranteeing reliable access to affordable power for (modernizing) African firms of all sizes. This approach, I would argue, is also the best way to sustainably increase power access and consumption for African households.
It’s time for a bold admission that merely checking boxes with lots of “one-bulb” connections to meet an arbitrary target should not detract from this more impactful objective.