ELECTRICITY CONSUMPTION AND ECONOMIC GROWTH – A COMPARATIVE STUDY OF NIGERIA AND GHANA

CHAPTER ONE

INTRODUCTION

Background to the study

Energy is crucial to the improvement of social and economic welfare. It is necessary to continued economic activity in modern industrial nations, and its absence would result in interruption of economic growth and diminishing standards of living. In fact, in developing nations a lack of modern energy services is a principal cause of low levels of economic and social development (Evans & Hunt 2009). Today’s modern economy thrives on energy consumption. Energy consumption is disaggregated into petroleum and electricity consumption, but this study shall be considering just an aspect of it, which is electricity consumption. Electricity is a key infrastructural element for economic growth. It is a multitalented ‘energy currency’ that underpins a wide range of products and services that improve the quality of life, increase worker productivity and encourage entrepreneurial activity (Adom, 2011). Furthermore, Jumbe (2004) asserts that Electric power is vital for economic growth and quality of life not only because it fosters the productivity of capital, labour and other factors of production, but also because it increases consumption of commercial energy.

Nigeria is Africa’s energy giant. It is the continent’s most prolific oil- producing country, which, together with Libya, accounts for two- thirds of Africa’s crude oil reserves. It ranks second to Algeria in natural gas. Most of Africa’s bitumen and lignite reserves are found in Nigeria. In its mix of conventional energy reserves, Nigeria is simply unmatched by any other country on the African continent (Sambo 2010). It is not surprising therefore, that energy export is the mainstay of the Nigerian economy since 1970s. Ghana on the other hand since her independence has grown her economy through agricultural and mineral export and industrialization. Crude oil imports account for approximately 10 % of total commodity trade (i.e., import plus exports), and consumes between 15 and 40 %of the nation’s export earnings (Armah,2005). Ghana’s Volta River Authority (VRA) owns and operates the hydroelectric project at the Akosombo Dam on the Volta River.  The dam which was completed in 1965 formed Lake Volta, the largest water storage reservoir in Africa and the world.  The lake dominates the geography of Ghana, covering 3.7% of the landmass with a surface area of 8,500 km2.  Lake Volta is more than 50% larger than Southern Africa’s Lake Kariba (Killick, 2010).

On the African continent, much energy is produced than consumed. However, this does not imply that there are no energy security issues. While most developed economies have a low energy/GDP ratio; which implies that economic activities do not depend so much on energy consumption. Evans and Hunt (2009) argued that, the social, economic and environmental development of many developing countries (DCs) is threatened by lack of sufficient, reliable and sustainable supplies of electricity. The surge in electricity supply (consumption) over the years has been a major issue of concern in many economies especially in developing countries. Whereas, reliable and economical provision of electricity ensures that consumption, transportation and production activities are adequately supported (UNIDO, 2008; Sambo, 2008; Yusuf and Nasiru, 2012).

For decades, the electricity sector has been considered a natural monopoly in most developing countries including Nigeria and Ghana, whereby private or public firms operate as monopoly suppliers subject to stringent government regulation. This includes pricing, entry, investment, service quality and other aspects of firm behaviour. Many countries are now introducing structural changes that foster competition in the generating, transmission, and distribution sectors of the industry, since adequate power supply is an unavoidable prerequisite to any nation’s development as argued by Sambo, Garba, Zarma, and Gaji (2010). Of the 15 ECOWAS countries only Benin, Ghana, and Togo have independent distribution companies (Pineau, 2008)

In as much as the demand for electricity varies widely from day to day over the year; it is also important to note that, electricity cannot be stored or inventoried economically by either consumers or distributors. As a result, the generation and consumption of electrical energy must be balanced continuously to maintain the frequency, voltage and stability of an electrical power network. As developing countries grow and expand their economies, their need for electricity increases. Studies have shown that there is a strong correlation between electricity use and wealth creation, income per capita, and socio-economic and physical features (Ekpo, Chukwu, and Effiong, 2011; Ferguson, Wilkinson and Hill, 2000; Ubani, Umeh, Ugwu 2013).

Surprisingly, for most developing countries, per capita electricity consumption has declined even with improved electrification rates. An explanation for this phenomenon is that poverty is the limiting factor for electricity consumption and poor household (have to) continue to use traditional fuels or self-generated electricity via burning of petroleum fuels (UNIDO, 2008). As a matter of fact, approximately 47% of the population in Nigeria has access to electricity as against 54% for Ghana (UNDP/WHO, 2009); beside the extent of electrification, it also has a quality dimension. Often the  population  that  has  access  to  electricity  suffers  from  poor  supply  quality  with  frequent  power blackouts (UNIDO, 2008). Not having access to electricity is an undeniable case of energy insecurity. The International Energy Association (IEA) therefore defines energy supply to be secure if it is adequate, affordable and reliable (IEA 2007).

Electricity consumption brings about changes in the structure of output in the economy by altering the manner in which other activity sector like the agriculture, industrial and service sectors that contribute greatly to economic growth operates. Moreover, one of the key policy objectives of any nation is to promote a sustainable economic growth process that could improve the living standard of the people. Economic growth is therefore considered an important goal of economic policy with a substantial body of research dedicated to explaining how this goal can be achieved (Fadare, 2010).

PROBLEM STATEMENT

The prominence of electricity to the socio-economic and technological development of any nation cannot be overemphasized. Hence, several researches have been carried out on the relationship between electricity consumption and economic growth (Iwayemi, 1993, 1998; Jumbe, 2004; Akinlo, 2009; Sambo, 2008; Adom 2011 among others). However, the complexity of the relationship and the presence of contradictory evidence between electricity consumption and economic activity indicate the need for re-examination of this relationship because of the importance it has in present-day economies.

The West African region generally has one of the lowest per capita consumption as far as electricity is concerned (Adebulugbe, 1991). According to the United Nations Industrial Development Organization (UNIDO, 2008) working paper report, it was stated “In the Economic Community of West African States (ECOWAS) countries, the average per capita electricity consumption is only 88 kWh annually”. This figure is against 1,157 kWh in developing countries on average, but the figure for Ghana in the last decade has averaged about 264 kWh while the figure for Nigeria is about 120kWh. Also, according to the Energy Information Administration (EIA), Brazil as at 2010, generated 506.8504 billion kilowatt-hours of electricity for a population of 196 million people approximately; South Africa generated 241.9274 billion kilowatt-hours for a population of about 49 million people while Nigeria and Ghana generated only 24.8722 and 8.2128 Kilowatt-hours of electricity for a population 161 million people and 49 million people respectively; when in fact the pendulum of productivity sustaining economic growth is perceived to be set in motion by technological advancement with dependable electricity supply as the press button.

To affirm the power situation in Nigeria, Ajanaku (2007) emphasizes that poor electricity supply and other factors have contributed to the dismal performance of the Nigeria’s industrial sector. Furthermore, experiences over the years show that the erratic and epileptic power supply has severely disrupted economic expansion leading to closure of businesses which could not sustain the huge cost of maintaining private electric generating plants, with concomitant job losses (Ikeme and Ebohon, 2004, Sambo et al. 2010). Nigeria use to rank 63rd worldwide and fifth in Africa in services output, but the growth of the sector is believed to have been crippled by low power generation and consumption. In the case of Ghana, the industrial sector is said to have been constrained greatly by the country’s bedeviled electricity sector, which produces 1,702 mega watts (MW) of power per annum (Mhango, 2010), The Ghanaian service sector is contributor to the nation’s Gross domestic product (GDP) and second only to the industrial sector in electricity consumption. During the period 2000-2001 it accounted for approximately 18 % of total electricity consumption. But due to draught that reduced the volume of water at Akosombo Dam, Both sectors were greatly crippled periods after (Armah, 2005)

Most Ghanaian empirical studies supported the unidirectional causality running from economic growth to electricity consumption which suggest that the policy of conserving electricity consumption maybe implemented with little or no effect on economic growth; however, the failure of Key Sectors in Ghana is attribute to inadequate supply of electricity (Armah, 2005 and Marful-Sua, 2010). On the other hand, a number of Nigerian empirical studies suggested that there is a unidirectional causality running from electricity consumption to economic growth which implies that restrictions on the use of electricity may adversely affect economic growth (Okafor, 2008); yet Nigeria records increasing GDP in the face of incessant power outages.

Puzzled by the electricity consumption-economic growth scenarios, it becomes imperative to re-examine the effect of electricity consumption on economic growth in Nigeria and Ghana. Another reason why it is important to re-examine this relationship is that the sector’s performance and linkages with the rest of the economy remain an enigma in the growth story of Nigeria and Ghana because even at its peak performance the contribution to economic growth is also a small one. Most importantly, previous studies favored mainly individual countries. However, not much attention has been paid to how electricity consumption in countries is related and how this correlation affects their economic growth it is on this basis that this research work seeks to answer the research questions in the next section.

RESEARCH QUESTIONS