Wednesday, 18 September 2019

Electricity tariff hikes will harm the poor

Zambia is once again experiencing crippling power outages with load-shedding of at least 6 hours a day in many parts of the country. The last time load-shedding was this heavy and this widespread was 2015. ZESCO, the electricity utility, says this year's load-shedding, just as the one in 2015, is due to low water levels at the country's main hydro power plants. Zambia generates most of its electricity from hydro sources.

The Zambian government is considering importing up to 300MW of emergency power from South Africa as a coping mechanism. Given the strained state of the country's finances, the Minister of Energy has suggested that electricity tariffs could be increased by as much as 75% to pay for the imports.

Research that my colleagues and I have conducted suggests that such a tariff increase would have grave consequences for the poor.

In 2017, ZESCO was allowed to implement a tariff hike of 75%. The motivation was that local tariffs were not cost reflective and needed to be adjusted upwards. Such an upward adjustment would make investments in electricity generation attractive for private sector players (the jury's still out on whether this has actually happened).

In a research paper that Mashekwa Maboshe, Akabondo Kabechani and I published this year in the journal Energy Policy, we simulated the likely impact of the 2017 tariff hike on different income groups in Zambia (published version here; ungated version here).

We found that the poorest 10% of Zambian households (the poorest decile) were likely to experience a 9.4% reduction in real household expenditure as a result of the tariff hike. In comparison, the real household expenditure decline for the richest 10% (richest decile), was only going to be 3.2%. In other words, the poorest 10% were going to see their real household expenditure decline at 3 times the rate that it would decline for the richest 10%.

An increase in electricity tariffs has the same impact on our incomes as inflation. Inflation, which is the general increase in prices, reduces the number of goods we can really (or actually) buy with our incomes. In other words, inflation reduces our real incomes or real expenditures. Electricity tariff increases have the same effect. Firstly, the tariff increase immediately affects the price of electricity (the direct effect). Second, because electricity is a vital input into the production of other goods, the prices of other goods also increase (the indirect effect). The poor are hardest hit because electricity and goods produced with electricity occupy bigger shares of their household budgets than the well-off. 

Lastly, our simulations showed that an additional 100,000 people would become poor as a result of the tariff increase. This is because their real expenditures would fall below the poverty line as soon as electricity prices went up.

Our work shows that the burden of increased electricity tariffs in Zambia falls overwhelmingly on the poor. One hopes that Cabinet and the public will take this into consideration as they debate the next round of tariff increases. 

(This piece has benefited from discussions with my coauthor Mashekwa Maboshe)