A Review of the current Energy-Poverty Debate

The following World Bank statement offers a good introduction into the topic:

“While rising petroleum prices have captured the headlines, for almost half of the world’s population energy problems take the form of a daily search for wood with which to cook food. Over 2 billion people still depend almost entirely on other traditional fuels, including crop and animal wastes.”

This sobering assessment was made in a World Development Report at the beginning of the 1980s (World Bank 1981: 40). Very little seems to have changed during the last two decades.

We currently witness a considerable surge in international oil prices and the World Energy Outlook of the International Energy Agency (IEA) draws pretty much the same bleak picture of the energy situation in developing countries. The IEA states that an estimated 2.4 billion people still rely on traditional biomass to meet their cooking and heating needs. It is even projected that the absolute number of people relying on biomass will increase to over 2.6 billion in 2030 due to rapid population growth and urbanization. In Africa the number is estimated to grow by 27 percent from 583 million to 823 million people and in South Asia, excluding India, by over 30 percent to 187 million people. The biggest reduction in biomass use is expected to happen in Latin America and Indonesia, where around a third of current biomass users will have abandoned consumption in 2030 (IEA 2002a: 390-391). International

Chapter 2: The Energy-Poverty Nexus electrification rates are commonly used as a second indicator to portray the insufficient energy situation in developing and transitional countries. According to the IEA some 1.6 billion people (one-quarter of the global population) completely lack access to electricity. 80 percent of the people without access to national grid systems or alternative off-grid applications live in rural areas, mainly in sub-Saharan Africa and South-East Asia. Africa has the lowest electrification rate with 34.3 percent, followed by developing Asia with 67 percent and Latin America with 86.6 percent. It is important to recognise that these aggregates contain significant regional variations. For example on the African continent, countries like the Democratic Republic of Congo, Ethiopia, Kenya or Uganda have electrification rates well under 10 percent, whereas in South Africa 66 percent and in the North African countries Algeria, Tunisia, Libya and Egypt more than 90 percent of the population enjoy access to electricity services¹.

Figure 2.1.1: Global Energy Poverty

Source: IEA World Energy Outlook (2002a: 400)

People lacking modern energy services are often but not necessarily identical with those 2.8 billion living in extreme poverty with per capita incomes of less than $2 per day (IEA 2002a:

375, UNDP 2002a: 17). This is especially the case for sub-Saharan countries. In the above mentioned countries Kenya and Ethiopia 62 percent and 76 percent of the population

1 The aggregate data is to be found in chapter 13, page 40 of the World Energy Outlook 2002 under “highlights”

(sic!). For a full account of electricity access data on a country basis, please refer to Table 13.A1 in the Annexes of the World Energy Outlook.

Chapter 2: The Energy-Poverty Nexus respectively fall below the $2 income margin (UNDP 2002b: 156/157). In other countries, the energy-poverty situation is more complicated. In China and Egypt only half of the population have daily incomes above $2 but more than 90 percent have access to electricity. Nevertheless, data on electrification rates often tell little about access reliability and affordability. This explains why in China, 706 million people still rely on biomass (out of 1.2 billion), while officially only 18 million people lack access to electricity (see Figure 2.1.1). A study which compared cross-country data for more than 100 countries revealed that energy consumption rises and the mix of energy carriers changes with increasing income. In particular, dependence on biomass is greater among countries with low per capita GDP, relatively large rural populations and more unequal income distributions (Leach 1992: 116-123).

However, the relationship between energy and poverty cannot be fully captured by solely applying monetary income indicators. A number of recent studies gave proof to the fact that a very strong linkage exists between commercial energy consumption and other important aspects of human welfare². Goldembergand Johansson for instance, point to the fact that low energy consumption is not the cause of poverty but a good indicator for many of its characteristics, such as poor education and healthcare. They show that 1 ton of oil equivalent (toe) of annual commercial energy consumption per capita can be used as a suitable threshold to determine the level of socio-economic development. When annual commercial energy use per capita is below 1 toe, infant mortality and illiteracy as well as fertility rates are high, whereas life expectancy is low. As commercial energy consumption increases and surpasses the 1 toe threshold living conditions improve substantially. Countries above a 2 toe threshold of energy consumption per capita rapidly approach the living standard of OECD countries with an average consumption of 5 toe per capita (Goldemberg/Johansson 1995: 4-6). This finding is supported by Suárez, who first plotted the Human Development Index (HDI)³ as a function of commercial energy use. His statistical analysis showed that energy consumption has an important influence on the HDI in the early stages of development. The HDI begins to increase notably between consumptions levels of 1 toe and 3 toe. From there on, the marginal

2 While studies by Goldemberg, Johansson, Suarez and Reedy are mostly quoted in recent publications, it should be noted that the first major studies to determine the role of energy in socio-economic development date back to the Latin American World Model studies of the Argentinean Bariloche Foundation in the 1970s (“Fundación Bariloche (1976): “Catastrophe or New Society: A Latin American World Model”. International Development Research Center: Ottawa).

3 The HDI measures human development with regard to three basic dimensions: long and healthy life, knowledge and decent standard of living. Life expectancy at birth, adult literacy rate and GDP per capita (PPP US$) are used to operationalize these dimensions and to calculate the composite index. For details on how the HDI is calculated, see UNDP 2003:341-342.

Chapter 2: The Energy-Poverty Nexus utility of increased energy consumption rapidly diminishes and even large improvements of energy services do not lead to increased human welfare (Suárez 1995).

Reedy refined the analysis by subdividing the energy-HDI function in three regions, an elastic, a transitional and an inelastic region (see Figure 2.1-2). In the elastic region impressive improvements in HDI can be achieved with very small investments of energy. It is even possible to decouple HDI improvements from income increases at this stage of development.

He supports his argumentation by giving an example of energy needs in the Karnataka State in Southern India. According to Reedy, only

100 watts per capita are needed to allow for clean and efficient cooking with liquefied petroleum gas (LPG) and sufficient home electrification for lighting, food preservation and entertainment. This is only one tenth of the energy needed to support living standards in Western Europe ⁴ . In the inelastic region enhanced energy services do not automatically lead to increased human welfare, but may indirectly be responsible

for HDI improvements by providing better conditions for income generation. He concludes, that “in the elastic region increased energy services guarantee direct improvement of HDI, whereas improvement of HDI via income depends on what the income is used for” (Reedy 2002:19).

The empirical results as outlined above indicate that the energy dimension of poverty fits well into the broader definitions of poverty, as developed in the international discourse over the last years. The theoretical construct “poverty” is today commonly perceived as “a multidimensional phenomenon, encompassing inability to satisfy basic needs, lack of control over resources, lack of education and skills, poor health, malnutrition, lack of shelter, access to water and sanitation, vulnerability to shocks, violence and crime, lack of political freedom and voice” (World Bank 2001: 3). In the same vein, the U.N Committee on Economic, Social

4 The example given above corresponds to the so-called „1 kilowatt per capita scenario” conducted in 1985. It was found out that only a 10 percent increase in energy consumption (equal to 1 kilowatt) would lead to a level of energy services in developing countries comparable to those of Western Europe in the 1970s. The scenario was developed under the condition that the developing countries would deploy the most efficient energy carriers and technologies available in the 1980s (Goldemberg, et al. 1985).

Figure 2.1-2: Energy Consumption and Human Development

Source: Reedy (2002): 118

Chapter 2: The Energy-Poverty Nexus and Cultural Rights described poverty as “a human condition characterized by sustained or chronic deprivation of the resources, capabilities, choices, security and power necessary for the enjoyment of an adequate standard of living and other civil, cultural, economic, political and social rights“⁵.

Energy in itself is not a basic need because people do not want the energy itself but the services it provides, e.g. lighting, heating, cooking or transport. Demand for energy is thus often defined as a “derived demand” essential in satisfying most basic human needs (DFID 2002: 5). If we rewrite the previously mentioned poverty definitions with regard to the energy dimension, we could conclude that: “Poverty can in many instances be described as a condition in which people are deprived of having access to modern energy resources and services leading to reduced capabilities, a limited menu for choice and finally resulting in a low standard of living and a weakened position in society”. What does the lack of modern energy services actually mean for the poor in their daily lives? In the following, the nexus between poverty and energy will be closely looked upon, by showing how insufficient energy provisions constrain the capabilities of the poor and contribute to their misery. The overview focuses only on some core issues for illustrative purposes (income, health, and environment) and is therefore rather exemplary than exhaustive. Many detailed publications have already been made on these issues and a wide range of other characteristic linkages could have been easily added to further underline the critical role of energy in human development (e.g. the linkages between energy and population growth, energy and urbanisation, energy and nutrition).

5 This poverty definition is part of a statement adopted by the UN Committee on Economic, Social and Cultural Rights on May 4th 2001 (UN Doc. E/C.12/2001/10).

Chapter 2: The Energy-Poverty Nexus 2.1.1 Energy and Household Income

The linkages between energy consumption and household income are manifold. Firstly, household spending for energy services reduces the disposable income and consequently involves opportunity costs. Especially poor households have the difficult choice of how to appropriate their scarce income between the need for basic energy provision (cooking, heating etc.) and other essential purchases, like food, clothing, shelter and health services. Low income households usually spend a higher portion of their available income and more time for energy services than do the rich. Many living standard studies conducted in developing countries confirm this fact. For example, a household survey carried out in Pakistan compared the household energy consumption in the lowest and the highest income quintile. The study showed that the poorest households devoted on average 100 hours more per year to the collection of biomass than did the wealthiest. This discrepancy was further reflected in the household spending behaviour. Rich households spent 30 times more on energy services than the poor, although the relative fraction of their fuel expenditures to total income was substantially lower (World Bank 1992). In South Indian villages people –mostly women and children– spend between 2 to 6 hours each day collecting wood and walk an average of 4 to 8 kilometres (DFID 2002: 9). The situation is much the same in sub-Saharan Africa, where women in rural areas often carry 20 kilograms of fuel wood and walk similar distances every day (Greenpeace/ITDG 2002: 7). These examples suggest that a simple focus on the monetary value of the household’s basket of goods and services would strongly understate the true costs incurred by the poor. The time lost to the collection or production of energy services indirectly reduces the income of the poor, because the time could have been better allocated to socially or economically productive activities like child care, educational training or remunerated work.

The metaphor of an “energy ladder” is often used in the development literature to describe the patterns of energy usage associated with certain income levels. At least in urban areas, households can theoretically resort to various fuels and end-use devices to meet their energy needs. These fuels comprise both traditional energy sources like firewood, agricultural waste, dung, charcoal or torches as well as so-called modern sources like coal, kerosene, LPG and electricity. Cooking devices cover a similar wide range of different devices from simple three-stone fires over kerosene wick stoves and LPG stoves to electric hot plates. Household income mostly determines which energy carriers and end-use devices are used. People living in extreme poverty predominantly use fuels like wood, dung or crop residues, which are

Chapter 2: The Energy-Poverty Nexus considered to be the lowest rungs on the energy ladder. Cynical but true, the combustion of these fuels is a “technology” reminiscent of the Stone Age and seems to have changed little in most rural parts of the developing world ever. With increasing incomes and improving socio-economic conditions, households generally climb up the ladder by substituting biomass for more convenient and cleaner energy carriers like kerosene, LPG and electricity. The fuels occupying the different rungs on the energy ladder also stand for different degrees of energy content and combustion efficiency. LPG stoves for example have considerably high efficiency rates of more than 60 percent, compared to 50 percent for kerosene stoves and less than 20 percent for ordinary fuelwood cooking devices (UNDP 2000:7).

While many cross-country household surveys confirm the existence of an energy ladder (see UNDP 1997: 2.1.1.2 or Hosier/Dowd 1987), it is important to recognize that the transition from traditional biomass to modern energy carriers is usually not a simple “straight-line process” (IEA 2002a: 368). It is true, that rising household income normally changes consumption patterns and increases the demand for modern appliances and better energy services. However, decision-making on fuel usage depends on a variety of additional factors.

Distribution infrastructure for modern fuels is often limited to a few urban centres and therefore beyond the reach of the majority of the population. Even if modern fuels are accessible and affordable, high up-front costs for new appliances like gas stoves or solar cookers may deter poorer households from changing consumption patterns. Poor people often apply high discount rates when making consumption decisions and therefore tend to neglect that large initial capital costs are in the long rung offset by lower life-cycle and operating costs due to efficiency gains (Reddy and Reddy 1994: 561-571). For example, in many households the operating costs of kerosene lamps to generate light are estimated to be 70 times higher then the equivalent costs from mains electricity. Power from battery use is still 10 to 30 times more expensive than from mains electricity (DFID 2002: 7). Solar cookers can help to reduce fuel consumption by 40 percent. However, their average amortisation time is 2 years (BMZ 1999: 64). Public awareness raising supplemented by innovative finance mechanisms like lending programmes from microfinance institutions can thus be crucial to overcome the initial barrier of high up-front costs.

A rise in household incomes does not necessarily mean a departure from the use of biomass.

More affluent households which can afford modern fuels and end-use devices tend to use these energy sources selectively and in combination with traditional energy carriers. The

Chapter 2: The Energy-Poverty Nexus combination of fuels often depends on local differences in relative prices. Electricity is used when necessary, for example for cooling, lighting and communication devices, whereas biomass is still used for less sophisticated needs like cooking or heating. As long as biomass is still seen as an almost free and readily available good, it is unlikely that even better-off households will completely opt for the more expensive modern fuels (IEA 2002a: 369).

The relationship between income and energy consumption is not one-sided. Energy services are more than just a cost factor because they are indispensable in generating income and improving education, for example through the provision of information technologies in schools. Energy input is essential in most work processes and its efficient use can significantly enhance people’s productivity and the profitability of their work. Labour productivity is often closely linked to the availability and affordability of reliable energy sources and efficient end-use technologies for energy transformation and storage. The provision of lighting extends the workday and helps to further one’s education in the evening, motorized transport helps to travel longer distances and to gain access to new markets and the substitution of human muscle and animal power by powering machines increases the output.

In developing countries most of the jobs for the poor are provided by family businesses and small and medium-sized enterprises (SME) in the rural and urban informal sector, such as bakeries, brickyards, pottery making, dyeing works, hot food stalls, or guest houses. Most informal sector enterprises use unprocessed biofuels (e.g. charcoal) and waste oils, which have a far lower energy content per unit of output in comparison to higher quality fuels like liquefied petroleum gas (LPG). While traditional biomass like fuelwood is often considered a free good in rural subsistence economies with access to timbered areas, in over-exploited regions and urban agglomerations it can turn quickly into an expensive and scarce commodity.

The procurement costs for fuelwood can often reach 50 percent or more of the total production costs (BMZ 1999: 15, ITDG 2004: 7). High fuel costs not only harm less important economic sectors but often have severe impacts on regional and national economic backbones, like palm oil processing in Cameroon or fish smoking in Mali. It is frequently overlooked, that high energy costs in developing countries are not only confined to production processes. Especially in the service sector energy use can reach expensive and unsustainable levels. In Nepal’s guest houses, tea shops and restaurants, more than 800,000 tonnes of wood are used annually to satisfy the needs of foreign tourists (UNDP 1997: 2.1.1.2). Inefficient use of biomass does not only constrain productivity of small manufacturing, food-processing and

Chapter 2: The Energy-Poverty Nexus service businesses but also negatively influences productivity in the agricultural sector.

Modern energy services are urgently needed to improve farming activities all the way through the food chain, including ploughing, crop cultivation, irrigation, harvesting, processing and transport. Moreover, agricultural residues and dung are often put to household use instead of using them as fertilizers to manure the arable acreage. This leads to additional expenditures for artificial fertilizer or meagre crop yields. An Indian energy research institute has estimated that the dung used as fuel in India would be worth 250 billion rupees ($800 million) per year if it were used as fertilizer (Tata Energy Research Institute et al. 1999: 149). Replacing traditional biomass use through modern energy sources would not only save valuable fertilizer but also increase the productivity of various agricultural activities like irrigation, crop processing, storage and transport of the products to the market.

In addition to the previously outlined energy-income linkages, consumption behaviour may be

In addition to the previously outlined energy-income linkages, consumption behaviour may be