Modelling the effect of disruption to electricity supply on economic growth in Benin

Dakpogan, Arnaud G. (2019-12)

Thesis (PhD)--Stellenbosch University, 2019.

Thesis

ENGLISH SUMMARY : Infrastructure is an important factor that contributes to economic growth. Energy, telecommunications, roads, rails, sea ports, airports, and drinkable water are important elements which determine the ease of doing business in a country. Among these various types of infrastructure, energy is essential, as it contributes to the development of other infrastructure. Energy is important for the construction of roads, telecommunication lines, sea ports, airports, and even the transportation of potable water. Among the different types of energy, electricity is essential as it plays a vital role in the functioning of all sectors of the economy. Electricity is used in industry, the health sector, at schools, in the transport sector, in the agroindustry, in the construction sector, in banks, in public administration, and in houses, amongst other things. Because of this, electricity is an important factor that contributes to economic growth and the improvement in the standard of living. However, the situation of sub-Saharan Africa regarding access to and consumption of electricity is very alarming. Sub-Saharan Africa has the lowest access to and consumption of electricity in the world. Benin is one of the countries with low access to and consumption of electricity in sub-Saharan Africa. In addition, the Beninese electricity sector faces three major challenges: a high level of dependency on the importation of electricity, high losses of electricity, and high reliance on oil for domestic electricity production. Benin is the only sub-Saharan African country which figures simultaneously among the top 10 countries for heavy dependence on importation of electricity in 2015, for the high proportion of electricity losses in 2015, and for the heavy reliance on oil for the domestic electricity generation in 2014 (most recent year for which data was available at the time of analysis). Other countries in sub-Saharan Africa figure in either one or two of these lists of top 10 countries. This indicates that in sub-Saharan Africa, the Beninese electricity sector is one of the most vulnerable. This was among the main reasons that the focus of this study is on the Beninese electricity sector. First, the country imports more than 70% of its electricity supply from neighbouring countries such as Ghana and Nigeria. Hence, it is very vulnerable to any electricity shortages occurring in these neighbouring countries. Such import dependency has resulted in electricity crises, which occurred in the 1980s, 1990s and 2000s in Benin due to shortages of electricity in Ghana. This is therefore one of the causes of disruption to the electricity supply in Benin. Second, the Beninese electricity sector encounters significant amounts of electricity loss during transmission and distribution. Such losses exceed the international target of electricity losses defined by ECA (2008). These electricity losses reduce the quantity of electricity supplied to consumers and are therefore sources of disruption to the electricity supply. Third, Benin relies heavily on oil to produce its electricity domestically, while the country is a net importer of oil. More than 90% of the domestic electricity production is based on oil. Hence, the Beninese electricity sector is exposed to fluctuation in oil prices. Increases in oil prices limit the country’s domestic capacity of electricity production, and therefore are a source of disruption to the electricity supply. The World Bank (2016) has reported that these disruptions to electricity supply have resulted in losses of sales by firms in Benin. The national policy framework for electricity (République du Bénin, 2008) also reported that these disruptions to electricity supply have negatively affected economic growth. However, there is no empirical evidence which has verified that disruptions to electricity supply have caused reductions in economic growth. In addition, the World Development Indicators (2018) reported that the share of electricity consumption in total primary energy consumption is very low, and has never exceeded 2.07% over 44 years (1971-2014). It is thus possible that disruptions to the electricity supply do not cause any reduction of economic growth. It is therefore important to investigate empirically the effect of disruptions to the electricity supply on economic growth. This was the main objective of the current study. Such an objective has been decomposed into three specific objectives. The first is to construct a composite index of disruption risk to the electricity supply in order to measure the performance of the Beninese electricity sector concerning the disruption of electricity. One of the goals of the national policy framework for electricity is the definition and improvement of performance indicators for the electricity sector and the national distribution company. Constructing a composite index of disruption risk to the electricity supply to measure the performance of the electricity sector, aligns with this goal. A composite index of disruption risk to electricity will be a useful tool for the monitoring of Benin in regard to electricity supply security. The second specific objective is to assess the effect of electricity losses on GDP. Such an objective aligns with another goal of the national policy framework for electricity, which is to use an indirect financing mechanism to fund the costs associated with the reduction of electricity losses. Such a mechanism suggests using funds from donors or the national budget to finance the costs associated with the reduction of electricity losses. It then proposes using the gain in GDP resulting from the reduction in electricity losses to reimburse the donors or the national budget. It is therefore important to understand the effect of electricity losses on GDP. Understanding the effect of electricity losses on GDP will help to assess the gain of GDP resulting from a reduction in electricity losses. It will therefore contribute to assessing the feasibility of the indirect financing mechanism proposed by the national policy framework for electricity. It will also contribute to advancing policy on electricity supply efficiency in Benin. The third specific objective is to assess the causal effect of negative shocks to electricity supply on negative shocks to GDP as is the general belief. As said previously, the national policy framework for electricity reported that disruptions to electricity supply have caused a reduction in economic growth, while there is no empirical evidence showing that negative shocks to electricity supply have caused negative shocks to GDP. It is therefore important to investigate empirically the causal effect of negative shocks to electricity supply on negative shocks to GDP. Such an investigation will contribute to verifying the conclusions of the national policy framework for electricity. It will also contribute to advancing the formulation of policy on electricity supply security in Benin. Two different approaches have been used to conduct these investigations and assessments: a symmetric and an asymmetric approach. The objectives of the study have been organized into three different empirical papers. The first paper constructed a composite index of disruption risks to electricity supply. Depending on the level of disruption risk, the values of such an index fall in the following ranges: [0.5, 1[ (low level of disruption risk), [1, 1.5[ (medium level of disruption risk), [1.5, 2[ (high level of disruption risk), [2, 2.5[ (very high level of disruption risk), 2.5 and above (extremely high level of disruption risk). The paper established that Benin’s performance concerning its effort to avoid disruptions to electricity supply is very low. Benin is among the countries of the world that have a very high level of disruption to electricity supply. The average values of the composite index of disruption risks to electricity supply for Benin over the periods 2002-2005, 2006-2010 and 2011-2015 are 2.157, 2.036 and 2.132 respectively. Benin was ranked fourth in the world with a very high level of disruption to electricity supply over the periods 2002-2005 and 2006-2010. Over the period 2011-2015, the country was ranked third in the world with a very high level of disruption to electricity supply. The second paper has established that on average Benin loses 0.16% of its GDP because of electricity losses. In other words, on average, Benin would have gained 0.16% of its GDP for a 1% reduction in electricity losses. This loss of GDP constitutes an inefficiency in the economy. This result confirms that the indirect financing mechanism proposed by the national policy framework for electricity is feasible. The third paper established that negative shocks of electricity supply cause negative shocks to GDP, while positive shocks of electricity supply have no causal effect on positive shocks to GDP. This result ascertains the conclusion of the national policy framework stating that shortages of electricity supply have caused reductions in economic growth. It also indicates that electricity supply is still low in Benin, and has not yet reached the threshold at which it will start having a positive effect on economic growth. Based on the results of these three empirical papers, it is recommended first that Benin must improve its electricity efficiency policy by for instance leaving the postpaid system and adopting the prepaid system. In the postpaid system, consumers have the option of not paying their electricity bills, resulting in a loss of revenue for the national distribution company and therefore for the government. Losses of government revenues constitute losses of GDP, because government revenues are included in the calculation of GDP. In the prepaid system, consumers purchase the amount of electricity they will consume and there is no option for them but to pay for their electricity, which makes the prepaid system more efficient than the postpaid system. Second, in order to reduce losses of electricity, it is strongly recommended that the country implement the indirect financing mechanism proposed in the national policy framework for electricity. Such a mechanism aims to finance the costs of activities that will promote the reduction of electricity losses. Third, it is recommended that Benin must try to avoid disruptions of electricity, because they have a negative impact on economic growth. Disruptions of electricity are caused by several factors including dependency on the importation of electricity and heavy reliance on oil for the domestic production of electricity. Benin must reduce both its dependency on importation of electricity and its heavy reliance on oil to produce electricity domestically. Fluctuations in oil prices have a negative impact on Benin’s capacity to produce electricity domestically. In many cases, shortages of electricity occur in the country because of sudden reductions of the available quantity of electricity to be exported by Ghana toward Benin. One way for Benin to reduce its heavy reliance on oil for the domestic production of electricity is to increase the share of electricity produced based on renewable sources in the total domestic production of electricity. Therefore, the production of electricity using renewable energy, such as solar and wind energy, must be explored. The country should increase access to electricity via the off-grid system with solar electricity. Other factors which cause a disruption of electricity are the low quality of the governance system and rapid urbanization. Poor governance has a negative impact on the delivery of electricity. The insufficient control of corruption and the weak rule of law have led to thefts of electricity on the transmission and distribution lines in Benin. Therefore, Benin must improve its government effectiveness, the rule of law, the quality of its regulatory system, and the control of corruption. When the growth rate of urbanization evolves more rapidly than the growth rate of urban access to electricity, there is a supply gap of electricity in urban areas because the urban demand of electricity exceeds the urban supply. Such a supply gap is a source of disruption of electricity. This is the case in Benin. In order to slow down massive migration from rural to urban areas, the country must provide rural areas with social and economic infrastructure such as schools, hospitals, paved roads, and so on, which will create an incentive for the rural population to continue residing in rural areas and not migrate to urban areas on a large scale.

AFRIKAANSE OPSOMMING : Geen opsomming beskikbaar.

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