In 1879, the year Thomas Edison invented a workable light bulb, the population of the world was 1.2 billion, all living without electric lighting. One hundred and forty years later, electricity remains inaccessible for a little more than 800 million people. For hundreds of millions more, flicking a light switch is a roll of the dice—sometimes the light turns on, but all too often power outages mean that candles and kerosene lamps need to be pressed into service.

For many decades, this situation has posed a stubborn hurdle for efforts to reduce poverty globally. Yet, research from different parts of the world has shown that electrification can transform economies and increase incomes by opening the door to commercial activity of all kinds—from small-scale manufacturing to shops that stay open after dark. In Brazil, for example, the expansion of hydro-electricity led to significant improvements in income and productivity and higher levels of education. In South Africa, improvements in electricity access helped increase female labor employment. Unreliable power has also been shown to increase the cost of manufacturing and lower productivity, while likely making it impossible to start many businesses. It is therefore no exaggeration to say that solving the energy access problem is one of the greatest development challenges of this generation.

So why do so many of the rural poor in large parts of Asia and Africa still live without power? Contrary to what one might think, it is all too often not because of a lack of money to generate enough electricity. India, for example, not only has more than enough generation capacity to meet current demand, in 2018-19 only about 50% was used.

Over the last eight years, we have worked with Robin Burgess and Nicholas Ryan in the Indian state of Bihar to explore why electricity consumption is so low and how it might be increased.  We posit that a primary cause lies in a deep-rooted social norm that electricity is a right and not a private good that must be paid for. As a result of this social norm, a vicious cycle is created. Customers—even the relatively rich—do not pay their bills. In turn, the state loses money for every unit of power that is consumed and to avoid bankruptcy has no choice but to limit how much electricity is purchased. So in contrast to typical businesses, these distribution companies try to sell less of their product. The resulting low quality supply makes consumers even less willing to pay.

This has created broken electricity markets where countries that could supply more power to their energy starved citizens choose not to. The result is that there are consumers who value increases in electricity consumption more than it costs to produce it, but the distribution companies won’t supply it.

To dig into the situation globally, my colleagues and I collected data on electricity prices and utility losses from around the world and found a large number of low-income countries have transmission and distribution losses far above the norm in the developed world. These losses could include everything from technical breakdowns to electricity theft. Many of these countries also price power below cost because they are supplying to a poor population. In low-income countries it costs an average of 6.4 cents per kWh to buy power and average tariffs are only 3.6 cents per kWh. If the costs of losses for technical reasons and non-payment are included, the effective cost rises to 7.8 cents per kWh. Thus, the average utility in a poor country makes 46 cents per dollar of input.

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Areas of Focus: Energy Markets
Definition
Energy Markets
Well-functioning markets are essential for providing access to reliable, affordable energy. EPIC research is uncovering the policies, prices and information needed to help energy markets work efficiently.
Electric Power
Definition
Electric Power
As the electric power system faces new pressures and opportunities, EPIC research is working to identify the mix of policies needed to accelerate the global transition to clean, reliable, affordable...