Decentralized Renewable Energy to Grow Manufacturing? Evidence from Microhydro Mini-grids in Nepal

Abstract

Firms in developing countries often identify electricity as a major constraint to operations. Decentralized renewable energy sources, which are often promoted as a tool to achieve sustainable development, could help alleviate these constraints by providing "clean" electricity to locations that are difficult to reach with the centralized electric grid.  We investigate whether electrification in Nepal -- via microhydro plants and their mini-grids -- helped grow the manufacturing sector and thereby induce structural transformation. Mini-grids led to a small but statistically significant increase in manufacturing establishments. Following electrification, females and males were more likely to be employees and less likely to be self-employed. Likewise, usual employment activities shifted from labor in agriculture to salary and wage work. In locations with smaller generation capacities, the impacts of mini-grids on labor-related outcomes were smaller. There is suggestive evidence of larger impacts in locations with better market access.

Keywords: electricity, manufacturing, employment, renewable energy

JEL Classification: O13, O14, Q42, Q56