Pay as you go: Pre-paid metering and electricity expenditures in South Africa

Abstract

Much of the coming growth in energy demand is expected to come from the developing world (Wolfram, Shelef and Gertler 2012). Existing evidence on the effects of electrification suggests that this is good news for development (Dinkelman 2011; Lipscomb, Mobarak and Barham 2013). However, it also introduces new challenges for both households and electric utilities since newly electrified households are likely to be poorer and more liquidity constrained. Thus, they may struggle to pay lumpy utility bills, resorting to non-payment when they do not have enough cash on hand or when service quality is poor (Szab´o and Ujhelyi 2014; McRae 2015). Utilities must provide larger amounts of energy at higher marginal costs and balance concerns over non-payment with the political and logistical cost of disconnecting households. We study a technological solution to the non-payment problem among low-income households: pre-paid electricity meters. Pre-paid meters constitute a large share of residential electricity connections in South Africa and are undergoing a rapid expansion in the developing world. We use detailed customer transaction data from Cape Town, South Africa to characterize electricity expenditures under pre-paid metering. By studying how expenditure patterns vary with property values, we provide suggestive evidence that expenditures by poorer households are driven by liquidity constraints and a difficulty smoothing income. This indicates that the monthly billing model is inconsistent with a revealed preference for small infrequent purchases among the poor, a preference also documented in other settings.

Citation

Jack, B.K.; Smith, G. Pay as you go: Pre-paid metering and electricity expenditures in South Africa. International Growth Centre (IGC), London, UK (2015) 12 pp.

Pay as you go: Pre-paid metering and electricity expenditures in South Africa

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