Subsidizing Electricity During a Pandemic: Lessons from Ghana
Ghanaians were promised heavily subsidized electricity for the first three months of the pandemic. What happened?
Today’s post is co-authored with Susanna Berkouwer, Pierre Biscaye, Miranda Lambert and Steve Puller.
A number of countries have offered free or reduced-price electricity as a stimulus measure during the pandemic (see Catherine’s earlier post). US utilities have not gone that far, but many are forgiving fees on late payments and have moratoria on shutoffs.
In Ghana, the government announced an electricity subsidy program in early April. Existing energy subsidies have long been the subject of policy debate: the high costs are often not worth the benefits, especially since these tend to accrue to wealthier households, and subsidies can reduce productivity due to increased power outages. However, it is often politically infeasible to dial back energy subsidies once they have been established.
But the challenges faced in 2020 are unprecedented. Do the lessons we’ve learned about energy subsidies apply when citizens face both a short-term economic crisis and a global pandemic? We have an ongoing research project in Accra, Ghana (described here), so we set up a survey team to try to understand how the electricity subsidy program was playing out.
Ghana’s subsidy provides free electricity (up to 50 kWh per month) for three months to “lifeline customers,” who consumed less than 50kWh in the month of March. Note that 50 kWh is not much electricity for a month – about what a typical US household consumes in two days. In Southern Ghana, lifeline customers account for about a third of all customers, though they’re less common in urban areas. Households that consumed more than the lifeline amount were promised a 50% reduction in the cost of electricity over the same time period, April-June 2020.
Our field team has conducted more than 2,000 phone surveys with over 1,200 households. Here are some of the early lessons.
What is going well:
- Low administrative costs & quick implementation: It’s one thing for the President to announce a subsidy program or legislators to pass a stimulus package, but actually getting the money into people’s hands can be a whole different challenge. Because the Electricity Company of Ghana (ECG) is a government entity with pre-existing financial relationships with many Ghanaians, it was relatively easy to implement the electricity subsidy. The program was announced by the President on April 9, 2020, rolled out on May 1, and by May 22 – the first week of our survey – 33% of the households had received their subsidy. Alternative stimulus programs, such as sending out cash or checks electronically or physically, can require whole new systems to reach beneficiaries, especially in developing countries.
- Reduced in-person contact: Limiting face-to-face interactions is crucial during a pandemic. In Ghana, a majority of people’s expenditures (including most electricity payments) involve in-person, cash transactions. In our sample, fewer than 10% of households can pay for electricity online. Since most people in Accra have pre-pay meters, they are not paying a monthly bill, but instead buying tokens for a certain amount of electricity. With the subsidy, people either get free electricity altogether and don’t have to go buy the tokens, or, if they’re receiving the 50% subsidy, they can buy tokens less frequently. By contrast, a cash transfer may not be as beneficial for recipients concerned about going out and spending during a pandemic.
- Political goodwill: Like the US, Ghana has an election this year, so in addition to helping their citizens, government officials are likely looking to score some political points. In our survey, almost 90% of respondents who report that they have received the subsidy believe that the incumbent party is doing at least an ok job addressing COVID-19. By comparison, only 79% of those who say they have not or are unsure if they received the subsidy are as supportive of the government’s Covid-19 strategy. And, these differences hold up when we control for things like what party the household supported a year ago. A cash subsidy may have been equally or even more effective, although it’s hard to get much higher than 90% approval ratings.
In addition to the positives, we also see some drawbacks:
- Households might prefer cash: Most economists are partial to giving people cash rather than stuff. People can use the cash to buy whatever they want. For example, with an equivalent amount of cash, some people would buy electricity, but some people might buy other things, like food, gasoline or clothing, and because they use their cash that way, they are revealing that they prefer those things to electricity. Recent research has shown that unconditional cash transfer programs can generate larger welfare gains than subsidies.
But, we asked people whether they would prefer 50 GHS (almost $9) worth of electricity credits or the same amount in cash. Surprisingly, 43% said they preferred the electricity credits. When we asked them why, most people said that they would use the money for electricity either way, and buying tokens can be a hassle; or they fear they would spend the money on something else and would rather ensure it goes towards their utility bills. This last rationale may reflect differences in spending preferences within the household (e.g., the wife is worried the husband will spend cash on something she doesn’t approve of), or it may reflect that people want to avoid their own worst impulses and think they would use cash unwisely.
- Limited reach: The subsidy may not reach those most in need. In 2018, 18% of Ghanaians did not have access to electricity, according to the World Bank. Households without electricity generally have fewer resources and may stand to gain the most from government support. Even among families with electricity in their homes, the subsidy may not reach the poorest, who often pay for electricity through a landlord. For example, in our survey, households that pay their landlord were almost 2x as likely to report that they hadn’t received their subsidy (though it’s possible their landlord did), and the landlord-payers were generally less wealthy. And, about a third of the people who don’t pay their landlords say they still haven’t received their subsidies, which further limits the reach.
President Akufo-Addo (Source: bbc.com)
Also, the way the subsidy is designed, households with higher bills get larger transfers than lifeline customers. At the current electricity rates, 50 kWh – the maximum monthly amount that is free – would cost about 19 GHS (approximately $3.35 USD). Those who used more than 50 kWh receive a 50% reduction in the cost of electricity for 3 months. In our survey, average March electricity spending was 94 GHS. This means that the average respondent is supposed to receive about 47 GHS worth of free electricity per month, or more than twice as much benefit from the subsidy as a lifeline consumer receiving at most 19 GHS.
A related concern arises from having multiple households on one meter, which is common in Accra. For example, imagine four households sharing one meter. Each of the households may qualify for the lifeline amount, and therefore free electricity, on their own. But if they all share one meter, the total likely exceeds the lifeline amount – so they would only get a 50% subsidy.
- Impact is limited: The subsidy is small in proportion to average total consumption (of all goods and services). For the average consumer, the total benefit from the subsidy is 141 GHS. This is about 1.6 days worth of total consumption for our average respondent. By contrast, the one-time $1200 stimulus check received by many US households is about 10 days of per capita consumption. A government program that subsidizes purchases of a good or service can’t provide more benefit than what people spend on that good or service.
Subsidies for critical goods can be a timely and effective mechanism for distributing funds to citizens in times of crisis, though there are drawbacks. In ongoing work, we’re investigating the impact of the subsidy on overall system reliability, household electricity consumption, and, we hope, the resulting utility finances.
Keep up with Energy Institute blogs, research, and events on Twitter @energyathaas.
Suggested citation: Wolfram, Catherine. “Subsidizing Electricity During a Pandemic: Lessons from Ghana” Energy Institute Blog, UC Berkeley, July 20, 2020, https://energyathaas.wordpress.com/2020/07/20/subsidizing-electricity-during-a-pandemic-lessons-from-ghana/
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Catherine Wolfram View All
Catherine Wolfram is Associate Dean for Academic Affairs and the Cora Jane Flood Professor of Business Administration at the Haas School of Business, University of California, Berkeley. She is the Program Director of the National Bureau of Economic Research's Environment and Energy Economics Program, Faculty Director of The E2e Project, a research organization focused on energy efficiency and a research affiliate at the Energy Institute at Haas. She is also an affiliated faculty member of in the Agriculture and Resource Economics department and the Energy and Resources Group at Berkeley.
Wolfram has published extensively on the economics of energy markets. Her work has analyzed rural electrification programs in the developing world, energy efficiency programs in the US, the effects of environmental regulation on energy markets and the impact of privatization and restructuring in the US and UK. She is currently implementing several randomized controlled trials to evaluate energy programs in the U.S., Ghana, and Kenya.
She received a PhD in Economics from MIT in 1996 and an AB from Harvard in 1989. Before joining the faculty at UC Berkeley, she was an Assistant Professor of Economics at Harvard.
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I guess this survey must be extended to other regions such as western. The bill have rather gone up instead of going down. So l asked, are we not part of the stimulus parkage announced by the president?
Lifeline rates can be justified by extending Harberger’s basic needs (food, housing, health, and education) to include electricity. The optimal unit subsidy is given by the “Lindahl voucher.” i.e. inversely related to household demand. The lifeline rate is an approximation of the optimal subsidy. A natural disaster or pandemic increases the optimal subsidy. But a better approximation can be had by adding a lower lifeline subsidy to those falling in an intermediate category, e.g. 50-100 kW per month, instead of subsidizing everyone at 50% or more.
To this theory, we can add your proposition that the transaction costs of delivering support to households can actually be negative since households save on the cost of buying tokens. This argument applies even if the government gives lifeline rates for the wrong reason (because they are a cheap way of buying votes).
This was very interesting to read. Even with the drawbacks, I think it’s a step in the right direction. I am Nigerian and this has not been done in my country. The Nigerian Government just rolled out the Nigeria Economic Sustainability Plan to respond to Covid-19 challenges, it’s a good plan on paper but a lot remains uncertain especially when it comes to monitoring its impact. The ability of the related Ghanian institutions to delineate consumers according to consumption and rollout the policy is impressive. I am curious about the data-situation in Ghana, particularly with reference to the utilities. It sounds like they have a good grasp of their system.
The issues of ‘limited reach’ and ‘most impactful reach’ remain serious things to consider, even in research. How do we define ‘those most in need’ and build systems that reach them efficiently and effectively? Looking forward to updates on this policy and others. Thanks for the article.