For utilities in developing countries, revenue collection can be challenging – and COVID-19 could be exacerbating the problem
In developing countries, improving the quality and reliability of electricity often depends on whether utilities can generate sufficient revenue to fund infrastructure upgrades – but this can be challenging, especially during a pandemic. Programme director Simon Trace explains more.
It is common for households and businesses across Sub-Saharan Africa and South Asia to receive low-quality, unreliable electricity, with them frequently facing unpredictable power outages, scheduled electricity shutdowns (load shedding) and voltage fluctuations. Nigeria’s national electricity grid even collapsed at the end of November 2020.
Problems are typically related to the capacity and quality of electricity systems. They can, for example, be a result of insufficient electricity generation capacity, ageing equipment, weak transmission and distribution networks or maintenance requirements.
Unreliable electricity limits the economic benefits of being connected to the grid. It can supress investment in income-generating electrical appliances and can lower output from existing ones, which decreases productivity and profitability and hinders entrepreneurship and job creation. According to World Bank Enterprise Surveys data, in Sub-Saharan Africa and South Asia, 41.7% and 46.1% of firms see electricity as a major constraint, respectively. Unreliable power can also reduce employment opportunities, and can inhibit the participation of women and youth in the workforce by making domestic chores more labour-intensive.
A persistent cycle
When the quality of electricity is poor, consumers may resist paying for it – feeling justified in not paying their bills, or even not paying for their electricity at all through meter tampering or directly tapping into electricity lines.
But low bill payment and high theft perpetuates poor-quality service. Non-technical losses (which include non-payment of bills and electricity theft) cost utilities an estimated $25 billion per year worldwide – and if utilities don’t collect enough revenue and recover their costs, they will have less money to invest in the infrastructure maintenance, modernisation and technical upgrades that are needed to improve reliability. Utilities in many developing countries often become trapped in a persistent cycle of low cost recovery leading to restricted and low-quality supply.
If utilities could deliver high-capacity, reliable electricity, it would boost the ability and willingness to pay for consumption – a study in Ghana found that firms would be willing to pay 12.6% more for uninterrupted electricity access.
COVID-19 and revenue collection
Concerns around non-technical losses and cost recovery have increased during the COVID-19 pandemic, with the crisis altering many utilities’ face-to-face revenue collection models as well as people’s ability to pay for their electricity.
In many developing countries, meter readers usually have to visit consumers, to not only read meters and record consumption, but also to deliver bills. Customers typically pay their bills at utility offices or other payment locations. However, during the pandemic, lockdowns and quarantines have restricted the movement of billions of people – having an impact on this revenue collection model, and therefore the delivery of electricity services.
Some utilities have requested that customers pay bills electronically, but this is infeasible for those without internet connections, computers or smart phones. And, without utility workers regularly patrolling neighbourhoods, prevention and identification of illegal connections and electricity theft will be lower.
Furthermore, with the COVID-19 pandemic severely affecting people’s livelihoods and finances, electricity customers could be even more likely to miss their bill payments. Some governments put short-term relief measures, including subsidies and payment deadline extensions, in place so consumers struggling to make payments could continue to have access to electricity, but this will have directly impacted utilities’ revenues, exacerbating the economic pressures they already face.
Utilities, as well as off-grid providers, will need help to stay viable and operational. In India, for example, the union power ministry allowed state distribution companies to defer the repayment of debts and interests for three months, bringing much-needed relief (but, in turn, affecting generation companies, which have their own debt problems).
Improving cost recovery
Prior to Covid-19, some utilities implemented measures to increase cost recovery. For example, modern metering systems (pre-pay or smart meters) were installed to help mitigate the problems of low payment and theft, and old infrastructure was upgraded with aerial bundled cables (ABCs), which are designed to prevent illegal connections.
These interventions were designed to mitigate problems in typical times. During COVID-19, they are potentially more important, with greater benefits, but there is currently no evidence on their effectiveness. This is being studied in an EEG project being led by Duke University. It analyses how COVID-19 has affected electricity distribution companies in Kyrgyzstan and Pakistan, and in particular explores how infrastructure upgrades such as smart meters and ABCs might have helped mitigate some of the impacts of the pandemic, reducing potential losses.
Before the pandemic, another EEG project, led by Jameel Poverty Action Lab (J-PAL) had started to evaluate whether advanced metering infrastructure (AMI) smart meters with prepayment can improve cost recovery, and thereby energy reliability and access. AMI technology can enable utilities to directly observe consumption in close to real time, and can help them to detect theft and remotely disconnect non-paying consumers or transfer them to pre-payment, while also encouraging accurate metering and billing. The project involves a large-scale neighbourhood-level randomised control trial in Haryana, India, where a smart meter rollout is already being implemented.
The role of tariff reform
Another issue hampering utilities’ profitability across Sub-Saharan Africa and South Asia is electricity tariffs being set below cost recovery levels. It has been suggested that tariff revenues are not enough to cover operating expenses in 20 of the 39 electricity sectors in Sub-Saharan Africa. And, in India, out of 45 electricity companies that Bloomberg has data for, just two are covering their cost of capital. Bloomberg suggests that India’s distribution companies lose around 360 rupees ($4.63) on every megawatt-hour of electricity they deliver – equivalent to roughly 10% of the retail price.
Some Sub-Saharan African countries have embarked on tariff reform in order to improve cost recovery, including Ethiopia, Zimbabwe, Zambia, Nigeria and South Africa – and earlier this year, it was reported that Southern African electricity users will pay more under plans by regional energy regulators to let utilities charge tariffs that reflect costs and create funds to increase power generation.
Ethiopia’s tariff reform involves a minor price increase for the first 12 months, followed by a steeper increase for the following 36 months. Customers consuming fewer than 50kWh of electricity per month will see no change in electricity prices, and households or firms consuming more electricity will experience higher costs per kWh. An EEG project, led by Ethiopia’s Policy Studies Institute, is evaluating the impact of the first phase on the demand for electricity among household and commercial consumers, as well as on the broader economy.
Tariff rises will of course be unpopular with consumers, especially if they are receiving poor-quality electricity. They can also cause disagreements between utilities, energy regulators and governments. South Africa’s state-owned utility Eskom has, for example, taken a tariff dispute with the National Energy Regulator of South Africa (Nersa) to court. In October 2020, Eskom launched a fresh court application seeking to recover R23 billion from consumers in tariff rises, which, according to analysts, will lead to double-digit electricity price increases in 2021/22 and beyond. It has been suggested that electricity tariffs in the country are set to increase by 52% over the next three years.
Meanwhile, in Kenya, the Energy and Petroleum Regulatory Authority (EPRA) reduced the retail price of electricity in November 2018 following an order from President Uhuru Kenyatta in the wake of widespread complaints from domestic customers and small businesses over a costly tariff adjustment introduced earlier in the year. It was recently reported that the electricity price cuts cost utility Kenya Power Sh4.8 billion in revenue for the financial year ended June 2019, and that the company was forced to take up short-term loans to fill the resultant financial hole. Kenya Power is currently pushing for an upward review of the tariffs, which it argues will enable it to cover the costs of capital-intensive construction and maintenance of its nationwide distribution system.
Across the developing world, electricity sectors are under stress. Non-payment of bills and electricity theft (which are potentially being exacerbated by the COVID-19 pandemic) – coupled with tariffs that are not cost-reflective – are putting utilities’ cashflows under significant pressure. Meanwhile, many households and businesses continue to receive unreliable, low-quality power, which severely limits the potential benefits of electrification – but financial and operational challenges make it difficult for utilities to make improvements.
Our Grid Reliability and Utility Operations Conference, held at the beginning of 2020, showcased findings from emerging research on the problems that utilities in low- and middle-income countries face in delivering reliable, sustainable electricity to customers. Topics covered included the impact of non-technical losses and power sector reform, including tariff-setting. It brought international researchers and policy makers from across the world together, with the aim of increasing research uptake. All presentations can be found here.