Electricity distributors incur large losses due to non-payment, compelling them to limit access and ration electricity

Subsidies and non-payment often lead to crippling losses for state utility companies. Figure 3 illustrates the road to insolvency for the electricity utility in Bihar, India, from the official rate down to actual revenue collected. Strikingly, the power authority is only able to collect an average revenue of 30% of the cost of supply and less than 20% of the official rate. Thus, the distribution companies lose 70 INR for every 100 INR of electricity supplied.

A large component of these losses comes from steep government subsidies, a common feature of developing country policy (see Figure 3). However, a similarly large fraction of losses come from theft (power that is used but not paid for) and non-payment (power that is billed but not paid for).

Technical losses of 5 – 10% due to electricity being lost as it flows down electricity lines affect utilities in developed and developing countries, but account for a relatively small portion of losses in developing countries. What divides utilities in developed and developing countries is the much higher prevalence of subsidies, theft, and non-payment in the latter. In Data from power utilities around the world reflects this picture: transmission and distribution (T&D) losses move from 23% in the poorest quartile of countries to just 6% in the richest quartile.

The consequences of mounting power debts for developing country government finances are severe enough to have macroeconomic consequences. Electricity debt in Pakistan recently grew to as large as 4% of gross domestic product (GDP) (Babar, 2018). Likewise, India’s distribution companies required bailouts in 2001, 2011, 2016, and 2017, and power debts in India reached US$ 62.5 billion (2.4% of GDP) in mid-2018, threatening to instigate a financial crisis (TFE, 2018). These large losses also make remedies more difficult: In Nigeria, power sector debt has discouraged private investment in generation (Akwagyriram and Carsten, 2018). When losses become crippling, utilities must take action to limit them in order to continue operations.

Figure 2: Cost recovery and bill payment in Bihar, India

The paradox of electricity as a right

Utilities typically respond to mounting losses by rationing supply. This accounts for the deliberately opaque name of ‘load shedding’, which amounts to a company choosing to provide less of its product – even though some customers are willing to pay more than the cost of supply. Distributors that fail to recoup costs lack incentives to expand access beyond the minimum required by their agreements with governments.

National power supply data from India illustrates the extent of rationing. In 2011-12, for example, virtually no households enjoyed uninterrupted 24-hour electricity. The median urban household received 19 hours of power per day, while its rural counterpart received only ten hours per day. In other words, rationing results in the disruptive outages to which much of the developing has become accustomed.

The paradox then is that treating electricity as a right ultimately limits people’s access to it. Facing large losses, utilities have a disincentive to invest in expanding access, maintaining infrastructure, or building generation capacity. A study of power supply in Colombia supports the notion that subsidies and low repayment rates deter investment in modernising electricity distribution infrastructure (McRae, 2015).

In turn, the resulting poor energy supply can discourage bill payments, creating a vicious feedback loop between poor supply and non-payment. A recent IGC study uses data from households in Ghana during and after a power crisis to show that households facing rolling blackouts accumulate larger unpaid balances, which is consistent with such a negative feedback loop (Dzansi et al., 2018).

Figure 3: Electricity losses in Bihar, India