The Growth Effects of Energy Shortages

Energy-rich countries may not be all alike, but energy-constrained countries are also often each unhappy in their own way. Taiwo Hassan Odugbemi, Meron Tesfaye and the Energy for Growth Hub break down the monolith of unreliable power supply in Africa, showing how the grid can struggle in a variety of ways with distinct economic consequences.

Nigeria is the poster child for grid dysfunction, with chronic outages leaving the grid so unreliable that self-generation (usually with diesel generators) exceeds the total capacity of Nigeria’s grid. Transmission is a big part of the problem, likely a main culprit in keeping nearly 70% of the grid’s theoretical capacity offline. Beyond the direct cost of outages, the cost of buying and maintaining expensive backup generators increases firms’ production costs (potentially to 4x that of industrialized peers), and probably keeps firms that can’t afford the cost out of the market. As the authors flag, the “missing growth” cost here is hard to estimate (although apparently easy to invent?), but almost certainly in the billions.

In Ghana, in addition to outages and self-generation, long-dated power contracts rushed through in response to an energy crisis continue to undermine utilities’ financial stability. South Africa illustrates the continuing economic drag of past energy outages, even after (partial) recovery, with an estimated 1.5% GDP loss in 2023 yet to be recovered. Egypt’s case is perhaps the most interesting analog for the US right now – (barely) sufficient grid capacity and limited self-generation for the moment, but an uncertain grid expansion path when staring down the barrel of rapid demand growth.