Speaker: Eugene Tan

Title: Connection Policy Design for Electricity Access: Lessons from Rwandan Electrification

Abstract:  Sub-Saharan utilities and governments have employed policies to promote electricity access that are distinctive from utilities elsewhere. First, while most utilities set flat-fee connection charges based on an average connection cost, some Sub-Saharan utilities have used distance-based connection charges based on a marginal cost logic. Marginal cost pricing creates strategic incentives for electricity adoption. Consider two households some distance from the grid. The first to connect pays more to extend the grid, while the second mover benefits from a lower cost after expansion. However, it increases equity. As the first mover will tend to have higher willingness to pay, this externality cross-subsidizes poorer consumers. In aggregate it serves as price discrimination that allows utilities to lower the minimum connection charge and increase equilibrium electricity access. Second, credit is unusually often paid through consumption tariffs rather than fixed installments. By affecting prices, it induces substitution from electricity. Even as repayment is decreased, this can counterintuitively increase utility profits, as most Sub-Saharan utilities have consumption tariffs below marginal cost. Finally, governments can choose to spatially delineate areas for on-grid and off-grid electricity. This reduces competition between the grid and off-grid providers everywhere, increasing producer surplus and electricity access at the cost of reducing consumer surplus from technology choice. We use a case study of Rwanda to study these tradeoffs in connection policies, which does all three. We estimate that Rwandan rural electricity access at the beginning of 2020 would have been half as high if they had counterfactually used standard connection policies.