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.
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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/
Catherine Wolfram is the Cora Jane Flood Professor of Business Administration at the Haas School of Business, University of California, Berkeley. During Academic year 2018-19, she will serve as the Acting Associate Dean for Academic Affairs at Berkeley Haas. She is the Program Director of the National Bureau of Economic Research's Environment and Energy Economics Program, Faculty Director of The E2e Project, a research organization focused on energy efficiency and a research affiliate at the Energy Institute at Haas. She is also an affiliated faculty member of in the Agriculture and Resource Economics department and the Energy and Resources Group at Berkeley.
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 implementing several randomized controlled trials to evaluate energy programs in the U.S., Ghana, and Kenya.
She received a PhD in Economics from MIT in 1996 and an AB from Harvard in 1989. Before joining the faculty at UC Berkeley, she was an Assistant Professor of Economics at Harvard.