Returns to rural electrification: Evidence from Bhutan

Abstract

Abstract Rural electrification (RE) is a core component of the Sustainable Development Goals and a major focal point of the global development community. Despite this focus, more than one billion people worldwide lack access to electricity, and electrification rates need to more than quadruple to meet international goals. We believe that lack of progress is partly driven by a know-do gap, a misalignment between academic research and the information needs of policy makers. Most studies measuring the impacts of electrification focus on precise estimation of a few outcomes, specifically health, education and productivity impacts. Other important impacts, e.g. environmental, have remained largely unstudied. As a consequence, quantifying the full set of costs and benefits of expanding electricity access is difficult and rarely done. When cost benefit analyses are done, they are often incomplete, and conclusions are highly susceptible to unavailable or uncertain parameters. We illustrate these arguments in the case of Bhutan, where RE rates have expanded rapidly in the past few decades. We show that RE via grid extension had positive impacts related to fuelwood consumption, education, and employment, but we do not find an effect on health. We then use these impact estimates to conduct cost-benefit analyses. For the cost-benefit parameters not available from our impact evaluation, we transfer reasonable estimates from related contexts. To acknowledge the uncertainty induced by this process, we conduct Monte Carlo analyses and confirm that, while the private NPV calculations are robust to alternative parameter values, the social returns are sensitive to estimates of the social cost of carbon and costs of grid operation and maintenance. Based on this exercise, we highlight research gaps that persist and that preclude 1) careful cost-benefit analysis of RE more generally and 2) financial investment in the sector.