Are We Looking for the Benefits of Rural Electrification in the Wrong Places?
Electricity can provide more than we think.
People talk a lot about the potential benefits of bringing electricity to some of the billion homes in the world that do not currently have it. Here are the most common arguments: kids can study more at night (lighting), new appliances will be time-saving (refrigerators or washing machines), people will be more informed about the outside world (TVs). I’ve seen lists of benefits like this in The Economist, promoted by the World Bank and on solar home system providers’ websites.
But, I suspect we’re thinking about how the US and Western Europe use electricity, and we’re imagining what it would be like to live in our own worlds without those amenities. I’m guessing that we’re extrapolating the aspects of electrification that we would have the hardest time living without to subsistence farmers in rural Africa or rural India, where the majority of the unelectrified currently live.
What if some of the main benefits to electrification in rural Africa or rural India will be to provide services that people in the US and Western Europe don’t associate with electricity? Or, what if the primary benefit is to address a problem that we don’t face?
Electricity as a source of credit
Let me give an example of what I have in mind. Together with my colleagues Paul Gertler and Brett Green, I’m working on a project with Fenix International (part of ENGIE), the largest solar home system provider in Uganda. Fenix is using its solar home systems in a very clever way to offer … you probably wouldn’t guess: credit!
Like most solar home systems providers, Fenix offers its units through a PAYGO model. (Over 85% of solar home systems are sold on PAYGO.) Customers pay a small deposit, less than $10, and bring home a Fenix solar home system. They then make daily payments using mobile money until they’ve paid for the system. If a customer doesn’t make a payment, though, the system will temporarily lock, preventing the customer from using it until they make their next payment.
Note that I’m not talking about the interconnected solar panels on some of my California neighbor’s homes. Fenix’s systems are standalone, and, in Uganda, Fenix’s smallest system is 10 Watts and biggest is 34 Watts – roughly two orders of magnitude smaller than the typical solar panel installation on Californian’s homes.
Fenix also uses the remote payment and locking technology to offer additional loans, such as their “school-fee loan” offered around the beginning of school terms. The thing that Paul, Brett and I find really cool is that the loans are essentially collateralized with the solar home system. This doesn’t mean that Fenix will go repossess the solar home system if the customer stops making payments on the school-fee loan. I’ve bumped over dirt roads on the way to some of Fenix’s customers, so I know that’s not an easy exercise.
But, think about how collateral works. If you take out a mortgage and offer your home as collateral, it serves two purposes. It provides the bank something of value in the event you default (role #1) and it punishes you in the event you default, hopefully incentivizing you not to do that, or not to take the loan if you think there’s a good chance you’ll default (role #2). If you’re like Fenix and lending to low-income farmers in rural Uganda, role #1 isn’t very valuable. Your borrowers don’t have much of value and the act of repossessing it from them (bumping over dirt roads) is costly.
Here’s where the magic of the solar home system comes in: it can be remotely controlled, so it can perform role #2 without someone going to physically repossess it.
Fenix’s leading credit product is the school fee loan. Delivered in cash to the customer to cover educational expenses, it is offered to the best-paying customers three times a year at the beginning of school terms. Rural Ugandans pay a good chunk of their income on school fees along with associated expenses like uniforms, pens, and books. We’re doing a study to measure just how transformative the solar home systems as collateral are: do kids stay in school longer if their parents have access to a loan from Fenix, or can their parents start businesses while still paying for school fees? Given that many rural Ugandans face erratic incomes, and that school fees often lose to other priorities, these loans via solar home system could be pretty important.
A new form of leapfrogging?
In previous posts, I’ve been critical of the idea that solar home systems are “leapfrogging” the grid. My view is that a solar home system is a different product than a grid connection – and not a clearly superior product.
In some ways, though, things like school fee loans via solar home systems are a first cousin to technology leapfrogging. Not in the sense of using a new technology to perform the same service (people often draw an analogy between solar home systems versus the grid for electricity and cell phones versus landlines for calls). But in the sense of using the same technology to perform a new service. Maybe it should be called “service leapfrogging.”
There are two reasons why this form of service leapfrogging might provide the main benefits of rural electrification. First, technology is evolving. For example, when the US embarked on rural electrification in the 1930s, the idea of mobile money and mobile loans wasn’t anywhere on the horizon. People were still walking their paper money to the bank, so the idea of electricity facilitating banking and payment systems was not even remotely on people’s minds.
Second, people in rural Uganda face their own economic reality, with unique challenges and opportunities. Going back to the rural US in the 1930s again, the vast majority of households had bank accounts. In Uganda today, fewer than 20% of people nationwide have an account at a financial institution. Put differently, there were 25 banks for every 100,000 people in the US in the 1920s and today in Uganda, there are one-tenth as many: 2.6 banks for every 100,000 people. Since Ugandans don’t have many ways to borrow money, they may really benefit from Fenix’s technology, whether to pay off school fees or start an enterprise.
It’s natural to be empathetic and extrapolate our own experiences, needs and wants to others. But, it’s also important to meet people where they are and provide the services that they most value. I look forward to seeing other innovative uses of electricity among the people who are just getting connections in sub-Saharan Africa, India and elsewhere.
Keep up with Energy Institute blogs, research, and events on Twitter @energyathaas.
Suggested citation: Wolfram, Catherine. “Are We Looking for the Benefits of Rural Electrification in the Wrong Places?”, Energy Institute Blog, UC Berkeley, July 29, 2019, https://energyathaas.wordpress.com/2019/07/29/are-we-looking-for-the-benefits-of-rural-electrification-in-the-wrong-places/
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Catherine Wolfram View All
Catherine Wolfram is the William F. Pounds Professor of Energy Economics at the MIT Sloan School of Management. She previously served as the Cora Jane Flood Professor of Business Administration at the Haas School of Business at UC Berkeley. From March 2021 to October 2022, she served as the Deputy Assistant Secretary for Climate and Energy Economics at the U.S. Treasury, while on leave from UC Berkeley. Before leaving for government service, she was the Program Director of the National Bureau of Economic Research’s Environment and Energy Economics Program, Faculty Affiliate of the Energy Institute at Haas from 2000 to 2023, as well as Faculty Director of the Energy Institute from 2009 to 2018. Before joining the faculty at UC Berkeley, she was an Assistant Professor of Economics at Harvard. Wolfram has published extensively on the economics of energy markets. Her work has analyzed rural electrification programs in the developing world, energy efficiency programs in the US, the effects of environmental regulation on energy markets and the impact of privatization and restructuring in the US and UK. She is currently working on several projects at the intersection of climate and trade. She received a PhD in Economics from MIT in 1996 and an AB from Harvard in 1989.
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I share people’s social concerns, but this article and this technology does demonstrate a couple of important things to this economist:
1) The first few kilowatt-hours are pretty transformational. If students can continue their studies after sundown, those few kilowatt-hours can help the next generation immensely. If we can add refrigeration to reduce food-borne illness, that’s also huge. The UN Secretary General’s Advisory Committee on Energy and Climate Change estimates 50 kWh per month per person to achieve their highest priorities.
2) If we can provide the most essential energy services from distributed sources at less than the cost of building a grid to bring centralized power, then the traditional utility argument that every customer should share equally in the cost of the grid basic infrastructure falls apart. This is the foundation of the so-called “minimum system” and “zero intercept” methods for distribution cost allocation. The point is that if people who want only a few kWh per month can get it for less than the cost of the grid, then the only justification for the grid is to serve those with larger energy needs, and the cost of the electric grid (like the grocery grid, the hardware grid, the petroleum grid and the clothing grid) should be built into the price for each unit sold.
3) Some of the US electric cooperatives will likely fail in the next decade, as distributed resources make inroads and satisfice part of their customer base. I’m thinking of coops in sparsely populated sunny places like rural Arizona and Nevada. If half of their customers have very small demands, and the cost of their grids are high, they are at great peril. If they charge for a basic grid connection in a hefty customer charge, they may alienate their small-use customers, and if they charge for the grid in usage charges, they may alienate their higher-use customers.
4) If the transaction costs of mobile money are low enough that these rural Ugandans are making DAILY payments, then our US utilities, with average monthly billing and collection costs of $3 or more need to learn how to do billing and collection from MTN, the leading mobile money provider in Africa. I think about this every time I buy button cells for my car fobs or other uses on Ebay: some seller in China is sending me 5 batteries, for which I pay a total of one dollar. Somehow that dollar covers the cost of the batteries, packaging, heavily subsidized postage, Ebay fees, Paypal fees, and leaves some profit margin sufficient for the seller to continue. Our utilities are woefully inefficient on billing and collection.
We can learn a lot from this project.in Uganda. Let’s get past the bad taste in our mouth, and move to a great idea in our brain.
This post also leaves a bad taste in my mouth for a different reason. I’ve spent considerable time working on health projects rural Africa and I’m highly a bit bothered by the various assumptions that inform role #2.
When we talk about those without access to electricity, we’re talking about some of the most vulnerable rural populations — many of whom are smallholder farmers. It is implied that punishment for failure to payback these loans, via a “locking” electricity system encourages only the best borrowers to participate in the lending operation. The assumed rationality does not transfer well to vulnerable populations. For example, many smallholders face high levels of uncertainty with regard to crop yields. This means they may not have a good idea about whether they will be able to payback the loans in any given year. Moreover, if we’re talking about highly vulnerable populations, we might expect them to be rationally bounded such that they consider only the short term benefits of cash on hand. When people are struggling to put food on the table, they are often not thinking about their long-run ability to payback a loan or access credit (e.g. the reason we have so many shady “payday loan” companies here in the US).
I would suggest that the author be a bit more careful about how she frames punishment — by way of limited electricity access — in the context of vulnerable groups. It’s not clear to me that this loan-based system is better than a direct government subsidy for rural electricity development.
Luke,
Seems clear to me that a direct subsidy is superior. Again, where is the World Bank and USAID?
Rural electrification is popular among politicians because it is easy to brag about. But as you have noted before, the benefits (such as improved school performance) are hard to document. And to the extent benefits exists, there is no compelling evidence that subsidized rural electrification is more cost effective than other poverty alleviation instruments (e.g. contingent cash transfers). But if the private sector is supplying the solar systems (even with a bit of a nudge from government), it’s a no brainer.
Discussions of rural credit have long assumed that the point of collateral is to reduce lender’s risk through taking possession of an asset. Your reason #2 (to incentivize repayment) is probably far more important. And the best thing is that the value of the collateral to the lender does not have to be greater than the loan. As long as people hate to have their (limited) power cut off, the threat can serve as a collateral substitute for multiple loans!
Interesting example…I’ve worked on public health projects in LMIC and endorse your premise that local folks are best able to identify needs, in partnership with technology advances and innovators. Does Fenix provide loans for other objectives (eg small businesses?) What interest do they charge the customer? In addition to tracking staying in school, will you be looking at overall financial impact on the family (eg debt trap…)? Is Fenix strictly private enterprise, or any partnerships with non-profitS?
Re above comment–while one can assert the importance of free public education, in the meantime, foregoing education isn’t an option attractive to Ugandan parents…
Claire and Stephen,
I agree.
I knew I would get flak from stating what I did. I just had to get that off my chest.
This article left a bad taste in my mouth. I find it appalling that these poor people have to pay to provide basic education for their children. Providing them with “credit” so they can pay for something should be provided free of charge is beyond the pale! This may be the conservative Republican view of the world; it is not mine. US companies should not be promoting such a misguided “capitalistic” concept.
All of the advanced countries provide free K-12 education. It is well established that the investment in k-12 education returns huge societal benefits. Why isn’t the World Bank and USAID stepping up to the plate and financing children’s education in Africa?
I guess so, but there’s how we want to the world to be, and then there’s how the world is. And let’s say the situation changes and this technology is being deployed somewhere where K-12 education was free (totally agree this should be the case) then maybe this kind of loan could be used to pay for something else, like a vehicle or a piece of agricultural equipment. I think the general argument about the potential benefits of “electricity access as collateral” still stands.