Productive Use of Electricity

Overview

Productive use (PU) of electricity is the basis for long-term sustainable economic development intended by rural electrification programs. The following article will focus on a working definition of the term ‘productive use of electricity’, explore the reasoning for the promotion of productive uses through governments or donor agencies and give an overview on potential interventions to support productive uses.

Defining Productive Use of Electricity

In the general discussion there have been several attempts to come up with a clear definition of the term ‘productive use’. While in some cases productive use is mainly defined through income generating activities that are directly positively affected by the use of electricity, others draw a much broader definition by including the use of electric energy for education and health or other welfare related activities.

A World Bank paper by Kamal Kapadia e.g. employs a broad definition of productive uses of energy as activities “that involve the utilization of energy – both electric, and non-electric energy in the forms of heat, or mechanical energy - for activities that enhance income and welfare. [In rural contexts] these activities are typically in the sectors of agriculture, rural enterprise, health and education.”

Jose Etcheverry takes a similar approach by classing as productive use projects in rural contexts those that “aim at enhancing income generation opportunities and productivity in rural areas […] to improve quality of life and increase local resilience and self-reliance”, with education and health mentioned among the key sectors for productive use of energy in rural contexts.

By contrast, Ron White's paper presented at a GEF-FAO Workshop on Productive Uses of Renewable Energy (2003: 33) suggests a more narrow definition of productive use of energy, taking into account only uses of energy that render outcomes that can be measured in monetary terms: “[activities that ] involve the application of energy […]to create goods and/or services either directly or indirectly for the production of income or value. The production of income or value is understood to be achieved by selling products or services at greater than their cost of production, resulting in an increase in the net income of the enterprise or the entrepreneur."

A similar definition is used in the Productive Use of Energy (PRODUSE) Manual that defines productive uses of electricity as "agricultural, commercial and industrial activities involving electricity services as a direct input to the production of goods or provision of services."

Why Support Productive Use of Electricity

In a 1995 review of the World Bank’s rural electrification projects in Asia, the Bank’s Operations Evaluation Department concluded that the “economic returns of rural electrification projects have been considerably lower than expected and a wide range of expected indirect and external benefits have not materialized".. One reason for this fact is that most rural electrification initiatives in the past have mainly focused on household and community needs for lighting. However, if rural electrification is intended as part of a broader development approach, a much higher priority must be given to strategies for promoting productive uses of energy.

The GEF-FAO Workshop on Productive Uses of Renewable Energy in 2002 therefore recommended to broaden the focus of rural energy programmes: “Many rural renewable energy development projects have primarily focused on household lighting using solar home systems (SHS). While such systems provide important social benefits and also may facilitate home-based income generating activities, there are a wide variety of productive-use benefits that can only be captured through applications other than home lighting. These other applications have been neglected in historical development practice”.

A recent paper by ESMAP argues that the most efficient way to deliver effective and lasting impacts when designing a rural electrification scheme is to ensure that such programs have a direct impact on livelihoods and revenue generation, in addition to impacts on standards of living. Increasing revenue generation can be accomplished by improving productivity or reducing production costs in an existing production process. It can also result from the uptake of new lines of productive activities based on electricity use that increase local value-added, generate employment and ultimately enhance local demand..

The rationale behind promotion of productive uses in energy projects is therefore multi-layered:

• Productive use can maximize the economic and social benefits of energy access. Energy projects with productive use components are more likely to lead to rural economic development than projects that simply focus on the provision of electricity, or other forms of energy.
• Incorporating a ‘productive use’ focus into energy projects makes them more likely to help achieve the Millennium Development Goals.
• Rural electrification projects with a productive use component are more likely to achieve economic sustainability. This is for two distinct reasons:

1. Enterprises that generate profits through electricity use have a higher ability to pay for energy services than private households who use electricity for purely consumptive purposes.
2. Obtaining financing for rural energy infrastructure, including Renewable Energy Technologies (RET) and grid extension, may be easier if rural financing agencies see that productive investments materialize from their credits.
   

What level of electricity access is required to enable income generation and economic development

A study carried out by IDS, TERI and Practical Action Consulting did not find a direct, unambigous relationship between the level of electricity access and poverty reduction. The study was based on a review of existing literature and case studies in Kenya and India.The three programs that had the highest increases in household income in their study included two grid extension and one solar lantern programme.

• See Impact of Energy Access on Enterprises

How to Support Productive Use of Electricity

There are several reasons why rural electrification alone does not trigger productive uses or small business development based on energy use. Conversely, specific preconditions and conducive factors can be identified that enhance uptake of productive use. Meaningful approaches for promoting economic development through energy use should seek to strengthen such conducive factors and to clear away hurdles for uptake of productive use of energy by small and micro businesses.

Fishbein summarizes the most important preconditions for productive applications of electric energy in developing countries:

• Knowledge and skill by small and micro-business, households and farmers on how to use new-found electrical and motive power for profitable enterprise.
• Technical and financial management capacity of small and micro-business, households and farmers.
• Availability of credit and micro-credit to finance productive tools and equipment.
• A policy and institutional environment conducive to business development, willingness to promote decentralized services, etc.
• Access to markets for additional or new products produced or services offered as a result of new electrical, heat or motive power
• Availability of a minimum of other complementary infrastructure services, such as transport, water supply and ICT services.

Where one or several of these factors are nonexistent, productive use of electricity may be hampered significantly. These requirements therefore provide useful entry points for the design of programmes to promote productive energy use; typical activities under such programmes may include:

• support for the dissemination of productive technologies,
• enhancing access to micro credit,
• facilitation of Business Development Services (BDS) and training,
• support the upgrading of infrastructure, or improved market access..

Previous experience has shown that good practice in promoting productive use of energy is to involve non-energy sector agencies or organizations to implement respective business development, financing and infrastructure services.

The Productive Use of Energy (PRODUSE) Platform provides examples of energy access projects promoting productive uses in different countries, and the PRODUSE Manual provides energy practitioners with step-by-step guidance for designing and implementing PU promotion activities.

How to Assess the Impact of Productive Use of Electricity at the Level of Small and Microenterprises

Electrification practitioners often emphasise the role of PUE in increasing income generation for home businesses and enterprises. However, systematic evidence on the relationship between access to electricity and poverty alleviation is scarce, and rigorous evaluations of electrification interventions particularly in Africa are virtually non-available.

In order to start filling this gap between practitioners’ perception and the lack of robust evidence, GIZ and ESMAP developed a methodology for evaluating the impact of electrification on micro, small and medium enterprises and tested it in Benin, Ghana and Uganda. The results are presented in the PRODUSE Study.

The underlying methodology is presented in the PRODUSE Impact M&E Guide, and the questionnaire as well as other resources can be downloaded here.

Further Information

• GIZ approaches for the promotion of productive uses of electricity
  
• Mechanical Energy
• Collection of Studies on Productive Use of Energy (Webpage Eric Martinot)
• "Productive Uses of Energy for Rural Development" (Cabraal, Barnes, Agarwal in Annu. Rev. Environ. Resour. 2005. 30:117–44)
• Productive use of PV in Bangladesh (721 KB)
  
• Productive Use of Energy in African Micro-Grids: Technical and Business Considerations (2018) NREL/Energy4Impact