This blog post was originally written for the World Bank as a summary of her presentation at the Infra4Dev Conference, jointly organized by the World Bank and the International Growth Centre on March 3rd-4th 2022, which brought together the academic and policy-making community to exchange knowledge and insights regarding the different roles that infrastructure can play in catalyzing development.
Energy is tightly linked to economic development. It is clear that higher levels of GDP are correlated with greater electricity use, access, reliability, and affordability (see Figure 1). While researchers struggle to understand the causal link between economic growth and energy, there is ultimately no route to development without greater energy consumption. History gives us a good example – prior to the industrial revolution, economies were bound by the availability and usage of organic energy sources, including firewood, man- and horse-power. When innovation and technology allowed coal to be used as an energy source, substantially more production possibilities were unlocked, leading to exponential production and economic growth. The open question is one of causality: can investment in energy infrastructure directly lead to growth or does it simply follow growth?
Figure 1: Different Dimensions of Energy are Closely Associated with Rising Per Capita Incomes (“The Impact of Electricity on Economic Development: A Macroeconomic Perspective” David I. Stern, Paul J. Burke & Stephan B. Bruns.)
Energy infrastructure may contribute to economic growth and development in several ways. First, electricity serves as a key factor of production for firms which, as research shows, has low substitutability with other factors of production and thus may constrain output when unavailable. Second, the state uses energy to deliver key public services, including health and education. Third, consuming electricity may directly improve household wellbeing as well as create efficiency gains, such as in time savings, communication, and educational investments.
For users to value and utilize energy, it must be accessible, reliable, and affordable. Accessibility is determined by infrastructure, including proximity to the grid, but also the affordability of grid connections, with evidence highlighting the link between high connection charges and low access. Reliability is important in allowing households and firms to plan investments and activities. However in many lower-income countries, blackouts are frequent and electricity access fluctuates throughout the day, due to infrastructure, markets, and politics. The price of electricity also determines its value and usage, which is informed by supply costs and the extent to which users pay their bills. Accessibility and reliability interact with pricing – for example, households might be unwilling to pay a given tariff for an unpredictable service. At the same time, a lack of payment or users might prevent investment in service improvements.
Effective infrastructure is key to ensuring energy can be used productively. The entire electricity grid – a network of infrastructure that includes generation, transmission, distribution, and wiring and metering – needs to work together. A weak link at any stage can hamper productive use. Beyond the electricity grid, infrastructure underpins the supply chain of most modern energy sources, such as physical networks of oil and natural gas pipelines, refineries, wind turbines, hydropower dams, and the many different transportation elements between them.
Economic researchers studying the relationship between energy infrastructure and economic development have found mixed results. For example, studies of energy access show divergent findings between longer-run aggregate studies, showing more transformative impacts, versus short-run analysis that reveal more modest impacts but rely less on models and more on data to derive their results. A similar tension exists in the literature on electricity reliability, where some studies find a long-run, aggregate link between reliability and firm productivity, while others show more modest impacts at the firm-level in the short-run. Evidence on electricity pricing is more scarce but shows that higher prices may lead to more non-payment by customers, whereas low prices can inhibit investment and ultimately access and quality.
Focusing on the entire network of infrastructure may help unlock the potential of energy infrastructure for development. Different parts of energy infrastructure, and in particular the electricity grid, are highly linked and interdependent. Every link must function well; investments in the weakest link may have the most transformative impact. For example, targeting investment in transmission infrastructure in the Philippines found substantial short-run welfare gains. In South Africa, investment in metering infrastructure was found to have large effects on consumption, revenue, and infrastructure investment by utilities.
Energy infrastructure relies on other forms of infrastructure, which can complement each other and help support broader economic development. For example, the cost of building electricity grid infrastructure might be lower where roads already exist. Roads and ports generally are important pieces of infrastructure that help deliver energy services, such as acquiring the fuel used in energy generation. Other infrastructure influences the prices of other factors of production, which in turn affect the impact of energy infrastructure on growth and development. Energy infrastructure will be more transformative when other markets are also primed for growth, such as well-functioning markets for outputs and credit, and active labor markets.
With climate change intensifying over the coming century, there will be significant demands on and requirements of energy infrastructure. Infrastructure itself is vulnerable to natural disasters, which will increase in frequency and severity. Additionally, climate change will likely induce greater demand on energy, such as from households requiring more cooling in the face of a growing number of hot days. At the same time, improving energy services may increase greenhouse gas emissions. To mitigate the impacts of energy use on climate (which in turn, drives energy use), energy infrastructure will need to support households in lower-income countries transitioning from traditional to modern sources of fuel, and grid electricity transitioning from fossil fuels to renewables. These issues will add new challenges to developing effective energy infrastructure for economic development.