Thursday, December 12, 2013

What Drives Electricity Adoption? A Review of Connection Charges in Sub-Saharan Africa

By Doug Barnes
Household Electricity Meter
Picture Credit: Douglas Barnes

Today many development agencies focus on the price and physical presence of access to electricity as being the main issue for lack of electricity in developing countries.  They may want to alter their thinking.  This is not to say that physical access and the price of electricity are not important, for clearly they are very important.  But a new study on Electricity Adoption and Connection Charges in Sub-Saharan Africa finds that an equally important factor may be electricity connection charges for new consumers.  Africa is the region with the lowest electricity access rates in the world (only 1 in 8 rural households and 1 of 2 urban households have electricity) and also is the region with the highest initial service connection charges.  One question not explored in this paper is the extent to which high connection charges are an indirect way for power companies to confine service to more profitable high income electricity users and to avoid political pressure to extend electricity to poor, low electricity using households. 

﻿﻿﻿﻿﻿﻿For electricity companies, expanding electricity to all makes quite a bit of sense for long term business development.  Electricity would contribute to economic development, and then more people could afford electricity.  As incomes grow even poorer people would buy more appliances and increase their electricity use, making them more financially attractive for electricity companies.  Thus, in the long term policies to expand electricity service make both solid financial and economic sense.

The rub is that in the short term most incentives to expand electricity to poorer and remote households are negative.  In such situations, the capital costs of lines, transformers and meters are prohibitive and only likely to be recouped if the price of electricity is relatively high.  Even if subsidies are provided for initial capital costs, once poor households adopt electricity they use very little power.  Sometimes even the cost of collecting bills from these consumers is above the amount of revenue that can be collected from them.  This has led some electricity companies to use flat rates (fixed charges with no meters), prepaid meters (prepaid cards) and load limited service (only allowing low amounts of electricity to be used at one time before a breaker terminates service).  The problem with all of these options is that they limit the amount of electricity that can be used and therefore the benefits for the poor populations.  This actually may limit future economic growth for a country, as opportunities for electricity use are lost.  The use of technology to solve the social problems of political pressure, electricity theft and refusal to pay bills may limit long term prospects for social and economic development. 

For electricity expansion, the problem always has been a classic public policy question of how to balance the short term financial disincentives to expand service with the long term social and economic benefits that comes with extending electricity to all. So how do you reach a balance to encourage electricity companies to provide a high level of service for poor people? 

The answers to this question may seem unusual and have been documented in my book on The Challenge of Rural Electrification (see side bar).  One way is to engage local populations in bill collection.  Community leaders such as teachers have been successfully recruited in countries like Thailand to both collect bills and to report service problems back to electricity companies.  This can reduce the amount of electricity theft.  Also, meters are absolutely necessary.  Load limited service, prepaid meters and flat rates all involve significant hassle costs for consumers, and actually may prevent people from using electricity for socially and economically productive activities.  It is better for electricity companies to view such consumers as future sources of revenue and profit.  However, for this to work it would be necessary to have adequate electricity prices that provide incentives for power companies to serve people in rural areas. This can be done by having subsidized rates for poorest households, balanced by slightly above average costs for higher income households who can afford such rates. 

Meters to measure electricity use are essential for electricity company planning. Regular meter reading and bill collection also are essential to keep companies interested in servicing rural electricity lines. Engaging local communities in partnerships also has been a way to ensure that the poorest households have access to electricity. Requiring communities to have high connection rates might result in utilities having adequate revenues to service rural areas. Sometimes higher income households are so eager to get electricity they will make sure the community has high connection rates, even if this means providing local subsidies to households with limited income. The use of high connection costs by electricity companies to discourage poor consumers from adopting electricity unfortunately actually does make short term financial sense, but it does so at the expense of their or their country's long term interest.

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