Keeping the lights on
A tangle of power cables hangs from poles in the center of Delhi, India.
mathes
Most people in high-income countries know that the lights will come on when they flip a switch. But that can’t be taken for granted in many parts of the world.
Unreliable sources of energy are a daily headache for households and businesses in poorer countries, and it could be a major stumbling block to economic growth.
A paper in the Winter issue of the Journal of Economic Perspectives argues that the root of the problem is that electricity is too often viewed as a right.
When power must be delivered regardless of payment, customers and providers no longer have the correct incentives, and markets stop working, according to authors Robin Burgess, Michael Greenstone, Nicholas Ryan, and Anant Sudarshan.
Figure 2 from their article captures the symptoms of this dysfunction in the electricity markets of rural Bihar, India.
Figure 2 from Burgess et al. (2020)
Each blue dot in the chart represents a portion of an electricity grid that serves about 2,500 households and businesses, a so-called feeder. The dots mark how many average daily hours a feeder supplies (left y-axis) and at what revenue rate (x-axis).
The revenue rate is the actual revenue collected by providers divided by the revenue that would be collected if all power were paid in full. It measures the share of revenue lost to unpaid bills, unbilled power, and technical failures.
Each green bar represents the fraction of consumers (right y-axis) paying a revenue rate within an increment on the x-axis.
If electricity markets in Bihar were functioning properly the blue dots would not be spread out. They would all be bunched up into the top, right-hand corner. In that case, electricity would be supplied 24-7 and the revenue rate would be close to 1.
Instead, many customers suffer from intermittent power, and some people who pay nothing get just as many hours of service as people who pay in full.
The slight, downward slope in the red line of best fit is even more at odds with market-driven outcomes. It indicates that people who pay more of their bill actually end up with worse service on average.
The authors say that Bihar’s situation is representative of much of the developing world. They advise policymakers in those countries to sanction electricity theft, cut subsidies, and privatize utilities to fix the problem.