More than a billion people worldwide lack access to reliable electricity, despite multilateral efforts across the globe that have poured resources into improving electricity access and reliability in order to spur economic growth. Research at the University of Chicago and partner institutes suggests that the root of the problem may lie in the fact that society too often views electricity as a right that does not need to be paid for. This sets off a vicious cycle: Consumers regularly don’t pay their full bills and governments often tolerate this. Power utilities then lose money every time they supply more electricity. Eventually, these companies become bankrupt and choose to cut-off supply because they can no longer afford to pay generators without recovering costs from consumers. And finally, because customers then receive poor energy supplies, they are even less likely to pay their full bills.
So what is the way out?
“It is critical to provide lifeline electricity to the poorest, but doing so in a way that causes electricity markets to fail harms everyone,” says study coauthor Michael Greenstone, the Milton Friedman Distinguished Service Professor in Economics and director of the Energy Policy Institute at the University of Chicago (EPIC). “Our view is that no solution will work in the end, unless the social norm that electricity is a right is replaced with the norm that it is a regular product that people pay for, just like food, cell phones, etc.”
Greenstone and his coauthors Robin Burgess (London School of Economics & Political Science), Nicholas Ryan (Yale University), and Anant Sudarshan (UChicago) offer three changes to the current system:
- Subsidy reform: Since consumers of all incomes often enjoy electricity subsidies, subsidies are frequently regressive and poorly targeted. Removing these subsidies and supporting the poor through direct transfers will allow them to pay for power without distorting the electricity market.
- Changing social norms: Introducing consumer incentives and changes to the bill collection process could reduce electricity theft and nonpayment of bills. The study shows that theft is not restricted to the poor. Indeed, larger consumers account for most of the losses.
- Improved technology: Technology-based reforms such as using smart meters would explicitly link payments and supply at the individual level.
The study draws upon microdata from poor, rural or small-town communities in Bihar, India, where the link between payment and supply had been severed. In 2017, customers received on average about 17 hours of electricity a day. Some areas paid their full share, while many more paid a share of less than 20 percent and the average paid only 38 percent. Most strikingly, areas that paid more didn’t necessarily get more power electricity. In combining this data with observations from several field experiments in countries like Brazil, Pakistan and South Korea, the researchers found this was indicative of a broader trend.
“At the heart of our recommendations is the goal of achieving universal access to electricity that runs reliably 24-hours a day, every day of the year, and the economic growth that it facilitates,” says Anant Sudarshan, South Asia Director of EPIC. “Many of these policies complement one another and seek to change how people think about electricity—that is, to break the social norm that it is ok to not pay their full electricity bills.”
Among other ideas to encourage bill payment, the team worked with the state-owned electricity distribution company in Bihar, India on an innovative pilot program that linked the amount of electricity supplied to consumers to payment rates in their neighbourhood. Areas that paid their bills more often were thus rewarded with fewer outages. This work, and the underlying vicious cycle undermining electricity expansion, is documented in the film Aayi Gayi—awarded “The Best Film on Human Rights” by the Woodpecker International Film Festival in 2019 and screened at several leading film festivals across the world. Learn more: https://www.aayigayi.com/