What’s the greatest limitation to a nation’s economic productivity? Data from the World Bank shows that energy is the leading barrier to a nation’s productivity.
Electrification rates rise steeply as countries move through the income bracket of $500-$1,000 per capita GDP. It intuitively makes sense that a country’s economic potential is highly correlated with its energy access — energy is an input to nearly every good and service, so when people make things or import/export more services, people need more energy. As emerging markets around the world become increasingly productive, energy systems must be in place to support economic growth and ensure that growth isn’t prematurely stunted.
Energy access is thus one of the most significant factors for economic growth and quality of life. According to USAID, people who have access to electricity have a 64% increase in household income. According to the UN, in East Africa, 36% of the households that had recently installed an off-grid solar system increased average income by 50%. According to the African Development Bank, Africa’s power outages sap up to 4% of its GDP growth every year.
Energy investment, unlike forms of highly-criticized “aid,” is self-sustaining, because it increases economic productivity faster than it increases debt burdens. More energy leads to more economic productivity, which in turn leads to economic ability to make more energy investments. As a result, small investments made into energy can have an outsized impact in improving the world. According to Jim Yong Kim, President of the World Bank, “every $1 invested in the power supply generates more than $15 in incremental GDP.” According to the UNDP, by 2030, opportunities from the Sustainable Development Goals, like energy access and expansion of renewables, could create over $12T in market opportunities, and over 85 million new jobs in Africa.
The troubling reality is that there are still over 1 billion people today without any electricity and at least another billion people in the world without reliable electricity. Based on current trends, there will still be half a billion people without electricity in 2040. Considering the correlation between electricity access and economic opportunity, the lack of energy around the world has an undeniable impact on our collective global economic productivity. Furthermore, Harvard professor Raj Chetty observes in the U.S. that “the top 5% of low-income children are no more likely to become inventors than below-average affluent children.” If this observation is a global phenomenon, there are profound cultural and economic implications when nearly a quarter of the human population remains in the dark. How many millions of Picassos, Einsteins, and Edisons have we missed due to lack of electricity access?
The world needs to achieve universal electricity access.
That’s not to say that we should always prioritize renewable energy — we shouldn’t.
If resources are local and widely available, then centralized fossil fuel generation is the most economical. Africa is home to 5 of the top 30 oil-producing countries in the world, and these countries have vast resources that can be used to provide cheap electricity.
However, even if fossil fuels are readily available, if water isn’t, then this changes the economics, since gas, coal, and nuclear plants will all need to be air-cooled, which is significantly more expensive than water-cooling. There must also be a modern and reliable electrical system, where households and businesses are already connected to the grid. But 85% of the billion people in the world without electricity today live in remote, low-density, rural areas where it will never be economic to build out the centralized infrastructure necessary to connect them.
And there are, of course, environmental and health costs of pollution (i.e. MIT research estimates that air pollution alone currently costs China $100B annually, and the World Health Organization reports that kerosene smoke kills 1.3M people in India annually).
Solar energy has thus already become the cheapest source of electricity for many households in Latin America, Asia and Africa.
But despite the competitiveness of clean energy, and despite the increasing number of pundits that talk about it, global investment into clean energy hasn’t actually increased in the last 7 years. Consider that nearly 60% of capital into emerging markets from 2014 through 2016 went to fossil fuel development, compared to 18% for clean energy. Organizations like the World Bank have also actively steered investments toward coal, gas, and oil.
This shouldn’t be the case. Africa is the sunniest continent on earth. A solar facility covering just 0.3% of North Africa could supply all of the energy required by the EU. Solar energy would have an overwhelming economic impact on emerging countries if initial financing were made available.
If global governments and organizations won’t help bring clean energy to these markets, it’s up to us. People and companies today can use platforms like Jumpstart to discover and develop solar projects anywhere in the world. The platform aggregates loans to develop high-impact clean energy projects, in partnership with some of the largest solar companies. The platform is currently open to corporate and institutional investors and will be open to retail investors in Q3 2019.
In achieving universal clean energy access, the world will unlock untapped economic productivity. I suspect we’ll also find more Edisons and Einsteins.