Paying for power: Prepaid electricity and the spending patterns of the poor

Project Active from to Energy

Revenue recovery is a challenge for electricity providers in developing countries. Poor customers often struggle to pay monthly bills, and providers face both cost and political economy barriers to enforcing payment. Increasingly, prepayment is used to solve this problem in the electricity and water sectors.

However, little work has been done so far to understand how this affects consumers. This research is motivated by two empirical facts observed in the study setting in Cape Town (South Africa). First, electricity use falls by around 12 percent when households are switched from monthly billing to prepaid metering. Second, low-income customers on prepaid metering purchase electricity in small quantities and at very high frequencies (up to every 3 days), reminiscent of the purchasing patterns of poor consumers in other domains. These patterns may reflect liquidity and other constraints of poor households, or deliberate choices - with very different welfare implications. Understanding the welfare consequences of different ways of paying for services such as electricity is an important step toward designing financial products that improve consumer welfare while also improving revenue recovery for service providers.

The study is organised around two core questions:

  1. Is the reduction in consumption associated with prepaid metering a choice by the household, or is it driven by constraints such as liquidity constraints and higher transaction costs?
  2. Do high-frequency purchasing patterns indicate demand for self-control, cash-on-hand liquidity constraints, or demand for savings?

The findings will shed light on factors that contribute to current high levels of payment delinquency on monthly billing and will inform the design of interventions to improve revenue recovery for urban services, while simultaneously meeting the demands of low-income households. More broadly, the research will help understand the drivers of high-frequency transactions observed in the expenditure patterns of poor households across many domains and settings.

The researchers will answer these questions with administrative data on electricity purchases by prepaid customers in Cape Town combined with real-time consumption data and customer choices over offers of free prepaid electricity credit.