This article was published by the Energy Policy Institute at the University of Chicago on Sept. 10, 2019.
It is a widespread belief in developing countries that electricity is a right to be enjoyed by all citizens. In practice, this social norm regularly results in customers not paying their electricity bills, stealing electricity, and bribing bill collectors—behaviours the government often tolerates. Consequently, power utilities lose money on every unit of electricity sold, leading to large financial losses that limit their desire and ability to maintain infrastructure, provide reliable power, and invest in expanding access to electricity. Because customers then receive poor energy supplies, they are even less likely to pay their bills.
As a result, this social norm that electricity is a right paradoxically limits access to electricity for everyone, according to a new publication based on findings from around the world with a special focus on Bihar, India. This insight comes from researchers at the International Growth Centre (IGC) at the London School of Economics & Political Science (LSE), the University of Chicago, and Yale University.
In the case of Bihar, the researcher—led by Robin Burgess (LSE), Michael Greenstone (Chicago), Nicholas Ryan (Yale), and Anant Sudarshan (Chicago), in collaboration with the Bihar state government—found that less than half of consumers of all income levels paid their electricity bills. This indicates that bigger consumers of electricity are just as likely to fail to pay their bills as smaller ones, underscoring that this is not a matter of an expensive redistribution program but a feature of the entire electricity market.
Furthermore, the power authority in Bihar only collects an average revenue of 30 per cent of the cost of supplying electricity, and less than 20 per cent of the official rate. In other words, the distribution companies lose 70 INR for every 100 INR of electricity supplied. They therefore must limit their losses by limiting supply: no consumers get 24 hours of electricity, the average consumer gets about 12 hours a day, and some areas only get 6 hours. As a result, there are consumers who value electricity at more than its costs but who are unable to purchase it.
“Surprisingly, we find no relationship between payment rates and the amount of electricity supplied to a given area,” said Burgess, IGC Director and LSE Professor. “This is a serious indication that the electricity market is not functioning effectively.”
“It is critical to provide lifeline style electricity to the poorest, but doing so in a way that causes electricity markets to fail harms everyone. Our view is that no solution will work in the end, unless the social norm that electricity is a right is replaced with the norm that it is a regular product, just like food, cell phones, etc.,” said Michael Greenstone, the Milton Friedman Distinguished Service Professor in Economics and director of the Energy Policy Institute at the University of Chicago (EPIC) and Tata Centre for Development at UChicago (TCD).
The paper recommends potential policy solutions that could shift the norm of treating electricity as a right to treating it as a private good to be paid for, like cell phones. These include:
- Tariff reform: Governments could get rid of subsidies for electricity, which already do not effectively target the neediest in many countries. For example, this could focus on replacing electricity subsidies with direct benefit transfers (e.g., cash transfers) targeted at the poorest.
- Social incentives: In Bihar, the researchers have instituted a payment incentive scheme covering 28 million people, in which communities that pay more for power receive more power. Preliminary results show such a system leads to increases in revenue and energy supply, a win-win for the customer and electricity distributor.
- Better bill collection: The researchers are also examining the impact of introducing performance incentives for bill collectors to increase their collections, aiming to also reduce collusion (e.g., bribes) between collectors and customers.
- Social trust: Trust within communities could also be leveraged to finance expansion of electricity access. If collection agents are your neighbours, for example, it may be more difficult to avoid repayment.
- Technology: Technology such as prepaid smart meters allows utilities to exclude non-paying customers from electricity access, which can chip away at the perception of electricity as a right. The team of researchers is planning to test the use of smart meters to help solve the non-payment problem in Bihar.
- Privatization: Though appealing in principle, privatization would require addressing non-payment norms first before it can have real impact. It may improve efficiency and be a viable option in areas with enough public support. For example, privatized distribution in Delhi in 2002 has seen fast reduction in losses and improved supply, but electricity prices have remained a political sticking point.
The publication is part of an ongoing project of IGC and EPIC’s India team, in collaboration with TCD and the North and South Bihar Distribution Companies. Funding for this project was provided by IGC and Tata Trusts.