The effect of pre-paid electricity metering on the poor: Evidence from Cape Town

  • Prepaid meters are spreading rapidly in the developing world because they facilitate revenue recovery. A pre-paid meter can be charged using a token with a meter-specific code. Tokens can be purchased from the utility company at points of sale, such as grocery stores.
  • The key difference between pre-paid metering and electricity billing is that electricity can be used only after charging up the meter rather than paying for it after use. This makes prepaid meters attractive to utility companies, which often have difficulty enforcing bill payments.
  • With the introduction of pre-paid metering, poorer households tend to reduce their overall electricity consumption more and buy smaller amounts of electricity at higher frequency. Many other goods poor households exhibit similar purchasing patterns.
  • Preliminary research results from an experiment in Cape Town, South Africa suggest that these observed changes are a function of the financial constraints poor households are under, leading them to spend significant time and effort on electricity purchases (transaction costs).
  • When introducing pre-paid metering, it is important to make electricity tokens easily accessible and to minimise the transaction cost of frequent token purchases, especially in poorer areas, to avoid disproportionally burdening poorer households.