Why it Matters
Why does getting electricity matter?
Infrastructure services (or a lack thereof) are a major concern for businesses around the world. Unreliable electricity supply and high tariffs, in particular, are obstacles to entrepreneurial activity. In the 2018 World Bank Enterprise Survey, which included 139 economies, business owners identified electricity services as the fourth biggest obstacle to their commercial activities.(1) Obtaining a new electricity connection can be complicated by burdensome connection processes. Once connected to the grid, firms may face blackouts that constrain production or force businesses to resort to self-supply through generators at a significant cost.(2)
Doing Business data for 190 economies suggest that the getting electricity indicators can serve as a useful proxy for the broader performance of the electricity sector.(3) Not surprisingly, greater time and cost to get an electricity connection are associated with lower electrification rates. A cumbersome connection process, consisting of numerous procedures, is more likely to occur in economies with an unreliable electricity supply, as these economies are plagued by inadequate electricity generation, coupled with high losses in the transmission and distribution systems. According to Doing Business data, South Asia is the region with the highest number of procedures (six on average) to obtain an electricity connection. According to the International Energy Agency, South Asia also experiences the highest electricity distribution and generation losses—averaging 19% of total electricity generation in 2016.(4)
The connection process is governed by numerous laws and regulations covering quality of service, general safety, technical standards, procurement practices and internal wiring installations. The process also involves various entities including utilities, municipalities, testing agencies, regulatory agencies and safety control agencies. Doing Business provides insight into the regulatory environment concerning electricity connections and measures how regulations and institutions affect a firm's ability to get a new connection. Doing Business can help identify bottlenecks and prompt policy makers to improve the process of getting a new electricity connection through the introduction of more conducive legislation and regulation.
While the efficiency of the connection process—as measured by the procedures, time and cost to get a new connection—is important for businesses, it relates to a relatively minor part of the overall power sector’s performance. Power outages, which impact everyone from small households to large industrial plants, severely hamper business activity as well as the economy as a whole. In Chad, businesses reported a value loss of 9.8% of total sales due to power outages in 2018, according to World Bank Enterprise Survey data. Studies have also shown that poor electricity supply adversely affects firm productivity and their investments productive capacity.(5) Further research shows that capital (domestic and foreign) tends to go to economies that can offer a reliable and competitively priced supply of electricity.(6) In light of such challenges, and to capture the adverse effects of frequent and lengthy power interruptions, the reliability of electricity supply and transparency of tariffs index was added during the Doing Business 2016 cycle to quantify the reliability of electric supply and the safeguards in place that help moderate outages and the risk of outages.
In most cases, a long-term approach is required to mitigate the adverse consequences of unreliable power infrastructure through considerable capital investments in the power system. Doing Business findings suggest that there is a wide array of practical actions that governments can take to ensure more reliable electricity service, such as having a robust regulatory framework with the right oversight and incentives, establishing minimum quality standards on service continuity, ensuring timely investments in power system infrastructure, investing in automated systems to identify network faults and restore service more efficiently, and so on.
Electricity services are among the most regulated areas of economic activity, and research has shown that sector performance is linked to the quality of regulatory institutions. A study covering 28 developing economies found that high-quality regulatory governance is associated with higher per capita electricity generation.(7) Energy regulators play various roles across economies, from the supervision of electricity supply quality to setting maximum thresholds for duration and number of power outages to the setting of electricity tariffs for final consumers. In this sense, an independent energy regulatory agency can be essential for governments to promote an efficient and reliable energy sector operation.
Finally, transparency of electricity tariffs is important for customers to be able to plan their expenses, better understand the utility billing system and contest the charges when needed. Businesses need advance knowledge of changes in expenditure to allow them to forecast overhead costs effectively. In some economies, utilities are required to announce tariff adjustments several billing cycles in advance. In others, the regulator helps ensure that tariffs are published through different media outlets and that adequate information and details are provided so that customers can calculate their electricity costs.
1. World Bank Enterprise Surveys (2002–18). The data sample includes 139 economies.
2. Foster, V., and J. Steinbuks. 2010. “When do Firms Generate? Evidence on In-House Electricity Supply in Africa.” Energy Economics 32 (2010): 505–14.
3. Geginat, Carolin, and Rita Ramalho 2015. “Connecting Businesses to the Electrical Grid in 183 Economies." Policy Research Working Paper, World Bank, Washington, DC.
4. International Energy Agency Statistics (1960-2014).
5. Calderon, César, and Luis Servén. 2003. “The Output Cost of Latin America’s Infrastructure Gap.” In The Limits of Stabilization: Infrastructure, Public Deficits, and Growth in Latin America, ed. William R. Easterly and Luis Servén. Washington, DC: World Bank.; Dollar, David, Mary Hallward-Driemeier and Taye Mengistae. 2005. “Investment Climate and International Integration.” Policy Research Working Paper 3323, World Bank, Washington, DC.; Reinikka, Ritva, and Jakob Svensson. 1999. “Confronting Competition: Investment Response and Constraints in Uganda.” Policy Research Working Paper 2242, World Bank, Washington, DC.; Eifert, Benjamin. 2007. “Infrastructure and Market Structure in Least-Developed Countries.” Department of Economics, University of California, Berkeley.; Limi, Atsushi. 2008. “Effects of Improving Infrastructure Quality on Business Costs: Evidence from Firm-Level Data.” Policy Research Working Paper 4581, World Bank, Washington, DC.
6. Audinet, Perre, and Martin Rodriguez Pardina. 2010. “Managing an Electricity Shortfall: A Guide for Policy Makers.” World Bank, Washington, DC.
7. Cubbin, John, and Jon Stern. 2006. “The Impact of Regulatory Governance and Privatization on Electricity Industry Generation Capacity in Developing Economies.” World Bank Economic Review 20 (1): 115–41.