Key message 3 – Developing countries need innovative policy solutions

To break this vicious cycle and transition towards universal, 24 hour electricity access, utilities in developing countries need to break the norm of electricity as a right.

EPIC and IGC researchers offer a group of solutions that individually address the problems of subsidies, theft, and non-payment – all with the goal of changing the way people think about power. Ultimately, the aim is to switch people to thinking about electricity as a private good that needs to be paid for (like cell phones) rather than as a right. Taken together, these policy measures could play powerful roles in preventing electricity distribution companies from descending into insolvency.

Tariff reform

The first major policy lever is tariff reform. Specifically, governments could eliminate explicit subsidies for electricity. This requires divorcing the goal of redistribution from the goal of providing electricity at full cost. This is especially attractive because, as discussed above, large subsidies are enjoyed along the entire income distribution, which makes them both regressive and implicitly supportive of the social norm that electricity is a right. For example, electricity subsidies could be replaced by a system of unconditional, direct benefit cash transfers targeted at the poorest. These transfers could be calibrated to match current tariff schedules but would be much more difficult for rich households to receive. An IGC paper shows how a direct benefit transfer programme that replaced subsidies for LPG in India led to decreased household fuel purchases by 11-14%, suggesting that it was effective at reducing leakages (Barnwal, 2018).

Social and performance incentives

The second policy tool is to tackle low repayment rates through social incentives or more effective payment collection. By enforcing a system that explicitly links feeder supply to neighbourhood payment rates, policymakers could shift the perception of electricity from a public good to a private good.

In Bihar, an ongoing EPIC-IGC study has instituted a group payment incentive scheme covering 28 million people, in which communities that pay more for power receive more power. This scheme explicitly links hours of grid electricity enjoyed by a community to bill collection rates via a transparent and heavily publicised schedule. Preliminary evidence shows that such a system leads to increases in both revenue and energy supply, making it a win-win for the customer and electricity distribution company (Burgess et al., 2019). A second policy option in this space is to introduce performance incentives for bill collectors to increase their collections. This could help stimulate collection efforts and reduce collusion (e.g., bribes) between collectors and customers. Another EPIC-IGC study in Bihar is examining the effects of such an incentive scheme (Burgess et al., 2019).

Social trust

A third policy reform might be to harness social trust to finance expansion. Rural grid expansion in the United States was driven by the use of rural electrification cooperatives (RECs) made up of groups of farmers who maintained the grid and collected bills (Lewis and Severnini, 2017; Kitchens and Fishback, 2015). If collection agents are your neighbours, it may be more difficult to avoid repayment. Electrification efforts in China were aided by similar local engagement with the electricity sector, through the hiring of farmers as part-time bill collectors (Aklin et al., 2018). Given the dire state of electricity distribution across the developing world, thinking about how trust within communities can be harnessed to increase the reach and quality of grid electricity is an important policy direction for governments to
consider.

Technology: Smart meters

Finally, policymakers can use technology to ease payment and restrict access for non-paying customers. Prepaid smart meters, which are becoming increasingly available, allow utilities to make electricity excludable at the household or business level, which can erode the perception of electricity as a right. In an IGC study in South Africa, prepaid meters led to a 13% drop in electricity usage and boosted profitability for the utility, indicating that the technology was successful in forcing consumers to pay for the electricity they used (Jack and Smith, forthcoming).

An EPIC-IGC study is currently being designed to see how smart meters can help break the non-payment problem for rural and urban consumers in Bihar (Burgess et al., 2019). Nevertheless, smart meters will be of limited use if consumers can hook directly onto power lines or wire around meters. Policymakers will need to use a combination of policy instruments and tailor approaches to their local context.