Subsidizing Electricity During a Pandemic: Lessons from Ghana
July 27, 2020
This post originally appeared on the Haas Energy Institute’s blog.
Ghanaians were promised heavily subsidized electricity for the first three months of the pandemic. What happened?
A number of countries have offered free or reduced-price electricity as a stimulus measure during the pandemic (see Catherine Wolfram’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:
1. 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.
2. 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.
3. 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.
2. 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.
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.
3. 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.
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