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Powering economic growth

International investors have long taken the view that economic growth and energy consumption go hand in hand. More rapid growth is considered to be dependent on access to energy resources; figures from the past 200 years bear this out. Levels of economic growth were closely correlated with those for coal consumption for the period 1800-1950 and with oil consumption for the decades since then. As a result, the construction of dozens of new coal-fired power plants in China is regarded as a sign of that country’s economic prowess. Similarly, the development of large hydro schemes in Brazil and gas-fired plants in India is given as evidence of optimism in the world’s biggest emerging markets.

Yet it would be wrong to base forecasts on past performance. Access to vast amounts of generating capacity is required to produce iron, steel and the other mainstays of an industrialised economy. Access to electricity is a prerequisite for the kind of manufacturing boom that China has experienced over the past 30 years. However, there is a great deal of evidence to suggest that the connection between energy use and GDP growth is becoming decoupled.

Firstly, the United States’ Energy Information Administration predicts that the amount of energy consumption required to produce a unit of GDP will fall steadily over the next 20 years and all the indications are that this ratio will continue to fall thereafter. Secondly, industrialised nations are seeking to reduce their carbon emissions per unit of GDP in order to help tackle climate change. This is most evident in the switch to renewable energy but is also beginning to manifest itself in greater energy efficiency and therefore lower consumption.

Next, there has been stronger growth in low energy consuming sectors over the past decade than in heavy industry and manufacturing. The internet is obviously based on access to electricity but online businesses require relatively little energy per unit of economic activity. The same is true of entertainment, advertising, insurance and financial services: the sectors that attract many of the world’s brightest and most innovative, in the same way as the railways and heavy industry in the nineteenth century.

It has long been received wisdom that the world’s poorest countries must industrialise before they switch their attentions to service sector occupations. Yet there is now a chance to leapfrog technologies, by missing out some of the stages that industrialised states passed through. In Sub-Saharan Africa, for example, many countries are focusing on mobile telecoms and virtually ignoring landline technology. There are already ten times as many mobile accounts as landlines across most of the continent. Mobile internet access is therefore taking off far more rapidly in Africa than many predicted.

In the same way, countries that have dramatically failed to develop large-scale thermal power plants now have the opportunity to opt for smaller, local wind, solar, geothermal, biomass and wave projects that remove the need to develop vast transmission networks. New technologies mean that a new relationship is developing between energy and economic growth, and it is time that investors began to incorporate this trend in their long-term plans.