Energy is arguably one of the major challenges in developing countries. Much research has been done on energy production, consumption and access, however energy reliability has been given less focus. Tensay Hadush, a doctoral candidate in economics at the School of Business, Economics and Law, University of Gothenburg, focuses his thesis on Ethiopian households’ preferences for reliable electricity supply and behavioral response to block based electricity tariffs. One of his policy recommendations is that the current low electricity tariff should be revised.
What is the most important result in your thesis?
I find that consumers are willing to pay more in order to have a more reliable electricity supply in place. These results provide insights on the importance of a reliable electricity supply. The estimated average monthly defensive expenditure is substantial and varies by the monthly hours of power outages and households are willing to pay 19%–25% of the existing average monthly bill (US$6.6) for improved electricity supply. I also show that residential electricity consumers do not respond to the additional prices under increasing block tariff (IBT) structure even if consumers are provided billing information. This, in turn, has severe implications for the efficacy of the policy objectives of IBT.
What are your policy recommendations based on your findings?
It is important to focus not only on access to electricity but also on the reliability of the supply to have a sustainable energy transition from traditional fuels to electricity and for people to be able to enjoy the benefits of having access to electricity. I also suggest that the Ethiopian Electric Utility to consider revising the existing low electricity tariff while considering the cooking needs for energy transition from solid fuels to electricity.
What is new in your study?
To my knowledge, this is the first study that analyzes households’ preferences for a reliable electricity supply using defensive expenditures and stated preferences approaches simultaneously. I provide an estimate of average monthly defensive expenditures at different monthly hours of power outages. In addition to the direct costs, power outages generate indirect costs such as inconvenience. Thus, in this study, I also elicit households’ willingness to pay (WTP) for improved electricity services from a hypothetical scenario of electricity supply improvement. The estimated average monthly defensive expenditures and WTP provide insights to look for ways to improve reliability of electricity supply.
This is also the first study in a developing country context to examine whether consumers respond to electricity prices in an IBT by combing administrative monthly electricity bill records with a detailed survey of sample households, and implementing a randomized control experiment. I find that additional prices under IBT do not affect electricity consumption even if consumers are provided billing information. This study provides essential information on why the policy objectives of the IBT structure may not be achieved in developing countries in general and in the case of Ethiopia. With multiple households per shared connection exceeding the consumption for a single household, these households pay at the higher rate for consumption in the higher block and therefore do not receive the subsidy intended for them. The distortion of the subsidy could be worse, as low-income households are more likely than richer ones to have a shared connection. In addition, the utility may not achieve its policies of electricity conservation and generation of enough revenue for operation, maintenance, and investment, when the existing electricity prices are low and do not affect electricity consumption.
What research results surprised you?
The additional prices under increasing block tariff do not affect consumption although such pricing system is widely applied to public utilities in developing countries to subsidize low income consumers, encourage resource conservation and recover costs of supply. Similarly, power outage has given less attention in terms of project funding and research compared to access to electricity, though it generates a significant direct and indirect costs to consumers.
What do you add with your research results to the environment and development bigger picture?
I identify local problems such as power outages and electricity pricing and combined with economic issues I boil them down to interesting testable hypotheses. These research problems are applicable not only to the Ethiopian context but also to other developing countries. Also, the research questions are highly policy relevant and have a significant welfare implication for many households in developing countries.
What impact does your work have on research and society?
While access to electricity has received a great deal of attention, its reliability has been given less focus in terms of project funding and research, though it is equally important. In developing countries, those with access to electricity experience frequent power outages. Similarly, in developing countries, increasing block tariff (IBT) structure is a popular tariff scheme as a tool to encourage resource conservation, recover costs, and subsidize low-income consumers. However, it is not clear whether consumers respond to marginal prices under IBT. In this thesis, I provide empirical evidence that residential electricity consumers do not respond to additional prices in an IBT structure even if consumers are provided billing information. A possible explanation such as the low electricity price is provided. And, the study suggests revising the existing low prices. Overall, the study provides important inputs in policies regarding to improving an unreliable electricity supply and in revising the electricity tariffs.
Tensay will return to his host institution in Ethiopia at Mekelle University to continue his research on Energy, Behavioral and Development Economics, and work closely with the EfD center in Ethiopia - the Environment and Climate Research Center.
Tensay Hadush Meles defends his theses: Power Outages, increasing Block Tariffs and Billing Knowledge, on October 3rd at the School of Business, Economics and Law. Tensay has been part of the Sida funded doctoral program in Environmental Economics at The Department of Economics.