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Perspectives

Unpaid Electric Bills Undermine Efforts to Improve Access and Reliability: EPIC Chicago

  • A new study by the Energy Policy Institute at the University of Chicago (EPIC) suggests that unpaid electric utilities in many developing countries including Pakistan have undermined efforts to improve access and reliability in the energy sector.
23 Dec 2020

While sufficient power generation capacity is necessary to meet the load requirements for commercial and domestic use, Pakistan’s power sector is constantly challenged by high electricity generation costs and inefficiencies in transmission and distribution. A new study by the Energy Policy Institute at the University of Chicago (EPIC) suggests that unpaid electric utilities in many developing countries including Pakistan have undermined efforts to improve access and reliability in the energy sector, contributing to widespread outages and rationing of power.

More than a billion people worldwide lack access to reliable electricity, despite multilateral efforts across the globe that have poured resources in to improving electricity access and reliability to spur economic growth.

Drawing upon micro data from poor, rural or small-town communities in Bihar, India, the study found that customers received on average about 17 hours of electricity a day in 2017. While some areas paid their full share, many paid a share of less than 20 percent and the average paid only 38 percent. Most strikingly, areas that paid more did not necessarily get more power electricity.

Combining this data with observations from several field experiments in countries like Brazil, Pakistan and South Korea, it was obvious that this severed link between payment and supply in Bihar, India was indicative of a broader trend in other developing countries. 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 gives birth to a vicious cycle, where consumers fail to regularly pay their full bills and power utilities lose money every time more electricity is supplied. 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. Hence, customers, as a result, also suffer when they receive poor energy supplies, which makes them even less likely to pay their full bills next time.

As the Government of Pakistan adapts to the unprecedented challenges emanating from COVID-19, it had decided to give relief to consumers for bill payments in installments. Although, this decision offered support to those inflicted with financial crisis amidst the pandemic, it reflected badly on the recovery position of DISCOs in Pakistan.

According to the State of Industry Report 2020 by the National Electric Power Regulatory Authority in Pakistan, the overall recovery of DISCOs during FY 2019-20 remained at 88.77% of the billed amount whereas it was at 90.25% of the billed amount during the FY 2018-19. This low recovery of DISCOs has hampered their ability to make payments to generation and transmission companies through CPPA-G. As on 30th June, 2020, an amount of Rs. 1,042,075 million was payable by CPPA-G to power producers and NTDC.

According to study’s coauthor Michael Greenstone, the Milton Friedman Distinguished Service Professor in Economics and director of the Energy Policy Institute at the University of Chicago (EPIC), “it is critical to provide lifeline electricity to the poorest, but doing so in a way that causes electricity markets to fail harms everyone.”

“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.,” he adds.

Greenstone and his coauthors Robin Burgess, Nicholas Ryan and Anant Sudarshan offer three changes to the current system:

  1. 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.

  2. 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.

  3. Improved technology: Technology-based reforms such as using smart meters would explicitly link payments and supply at the individual level.

“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. He further explains that “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 EPIC team also worked with the state-owned electricity distribution company in Bihar, India on an innovative pilot program that rewarded those who paid their bills with fewer outages to encourage payments.

This study was authored by Michael Greenstone (University of Chicago), Robin Burgess (London School of Economics & Political Science), Nicholas Ryan (Yale University), and Anant Sudarshan (UChicago).