Key message 2 – Delinking electricity supply and payment results in rationing for non-market reasons

High enforcement costs, technological constraints, and the ease of theft prevent distributors from cutting off access only to households that fail to pay for consumption. Current technology does not allow for easy targeting of supply, which means that individual households can’t be excluded. Power distribution companies thus face the option of rationing supply at a higher level (e.g., at the feeder level in Bihar, which comprises about 2,500 households and businesses). The surprising result from the EPIC-IGC study in Bihar, is that the distributors do not do so: Feeder-level data shows no relationship between payment rates and the amount of electricity supplied.

This finding indicates that non-economic factors are at play. Electric utilities in developing countries are not behaving like profit-maximising firms. Even if a utility is physically able to cut off a group of delinquent customers, the perceived right to electricity for all citizens may render it unwilling to do so. Under the social norm that energy is a right, the allocation of power is no longer performed on economic grounds, just as the pricing of power is not.

The right to electricity also politicises allocation: If citizens engage in protests regarding electricity received, or equivalently, if politicians promise to deliver more power in exchange for votes, the right to electricity can feed directly into the supply decisions of utilities through politics. Governments that ultimately have to bail out the utilities end up dictating where electricity flows to.

Data collected in the EPIC-IGC study in Bihar illustrates the non-economic factors behind electricity allocation. Figure 4 shows deviation from mandated production schedules over the course of 1.5 years. Operators have significant discretion to deviate from the production schedule and researchers disaggregate those deviations using administrative data. Weather and technical constraints play some role, but the majority of deviations are political or bureaucratic in nature. The biggest spikes in deviation, when many areas get more power, are during widely celebrated public holidays. This evidence adds to a growing literature on the connection between politics and electricity supply (Mahadevan, 2019; Asher and Novosad, 2017; Baskaran, Min and Uppal, 2015;
Shaukat, 2018).

The fact that electric utilities allocate supply based on non-economic factors further strengthens the idea that electricity is not a commodity that must be paid for like other services. If protesting for power yields results, consumers are even less likely to pay for electricity in the future. Thus, this vicious cycle leads to supply of electricity and payment becoming delinked.

As a result, developing countries face large welfare losses since customers willing to pay for electricity supply are not able to purchase it. The value created from businesses that require reliable power, or just the simple enjoyment of watching a film uninterrupted by a sudden blackout, is foregone in societies where electricity is viewed as a right.

Figure 4: Non-market influences on supply in Bihar, India