Abstract
Until recently, the price of electricity in Ethiopia was among the lowest in the world. Such low prices have contributed to a substantial financial deficit for the government-owned electric utility and led to a degradation in the quality of electricity services delivered to customers. In December 2018, the utility increased the electricity tariff to help to finance improvements in the quality of electricity services. This paper studies the effect of the revised tariff on urban household electricity consumption and alternative fuel expenditure. The study relied on two rounds of household survey data and six years of electricity consumption data from the utility company. The study finds that prepaid customers reduced their electricity consumption by about 22 kWh per month in the post-tariff-adjustment periods, equivalent to about 10% of electricity expenditure and 14% of daily consumption. In the overall sample, however, consumption slightly increased over time. These results imply that the price elasticity of demand for electricity in urban Ethiopia is highly inelastic. Moreover, households did not shift substantially toward the use of alternative fuels. The findings indicate that governments and utilities in settings where electricity is priced well below cost-covering levels may be able to increase revenues and improve their balance sheets with relatively modest effects on households’ electricity consumption, though effects from more substantial tariff hikes should be examined.
Highlights
- The price of electricity in Ethiopia was until recently among the lowest in the world.
- The utility company increased the electricity tariff with the aim of improving the quality of electricity services.
- This paper studies the effect of the revised tariff on urban households' electricity consumption.
- The study result shows a highly inelastic demand.
- The study has policy implications in settings where electricity price is well below cost-covering level.
Keywords
Electricity price
Tariff reform
Electricity consumption
Event study
Ethiopia
