Working Paper 318

Power Sector Reforms in Ethiopia: Implications for Rural Electrification

Energy Services for the Urban Poor in Zambia

 by Oscar Kalumiana

Executive Summary

It is estimated that about 2 billion people globally do not have access to modern energy.  While poverty is more pronounced in rural areas, there is a considerable number of urban poor people. In Zambia at least 56% of all urban residents are poor. Only 48% of the urban population has access to electricity. Urban residents in Zambia depend on 4 main fuels: electricity, charcoal, firewood and kerosene. Kerosene is mainly used for illumination, electricity for both illumination and cooking while charcoal and firewood are used mainly for heat related end-uses mainly cooking. Electricity is the most important lighting fuel for urban residents. Of these 4 fuels, electricity is subsidized.

The Central Statistical Office (CSO) categorises urban households into three groups: extremely poor, moderately poor and non-poor households. Analysis of household expenditure showed that all households expended less than10% of their total monthly income on energy services. In 1998, extremely poor, moderately poor and non-poor households expended K 17,851 (US$ 8.45), K 19,073.59 (US$ 9.03) and K23,507.55 (US$ 11.12) on energy services representing 7.89%, 6.17% and 5.86% of their total monthly incomes, respectively.

When all fuels used by urban households in 1998 were converted to useful electricity unit equivalents, it was found that, on average, extremely poor, moderately poor and non-poor households used the equivalent of 163 kWh, 172 kWh and 216 kWh per month, respectively. Non-poor persons consumed twice as much energy compared to poor households. Households could cover the cost of electricity from their current energy budgets at the Average Cost Based Tariff  (ACBT) which was US cent 4.5/kWh. At the Long Range Marginal Cost (LRMC) of US cent 6.5, all households would not have afforded electricity at these consumption levels.  The LMRC is, however, not feasible in Zambia as it will take about 13 years of progressive tariff increases to reach it. The ACBT was, therefore, used to assess affordability of electricity by households.

Further analysis of household energy issues led to the following conclusions: 

1. Poor households could afford the cost of modern energy services using their current energy budgets. Similar findings have been reported in other countries. In Ethiopia, poor urban households can afford kerosene and electricity without subsidies provided the fixed costs are spread over time (Bekeret & Kedir, 2001). In Zimbabwe, urban households do not consider energy subsidies to be decisive for their affording modern energy services (Dude, 2001). 

2. Poor households could also afford the up-front costs of electric stoves, house wiring and connection if these costs were spread over a period of time (e.g. 10 years). These costs could be included in the electricity tariff to enable poor households meet them.  

3. The bulk of the total energy subsidies arising from pricing of electricity below the ACBT is captured by the non-poor. In 1998, the non-poor captured K8.8 billion (US$ 4.2 million) in electricity subsidy, which represented 83% of the total subsidy on electricity.

4. The total electricity subsidy amounted to K104.6 billion (US$ 49.5 million). Out of this figure urban households captured 10% of the total. This figure represented the largest portion of the subsidy to a non-productive sector. 

5. Subsidies place a big burden on public finances. The 1998 total electricity subsidy amounted to 56.2% of the central government deficit. This proportion of subsidy was higher than that in Uganda and Zimbabwe. 

6. In 1998, the total subsidy on electricity was eight (8) times more than ZESCO, the national electricity utility’s, net current assets.  

7. It appears there were no adverse effects of electricity tariffs on small and medium scale enterprises (SMEs).  In order to increase SME productivity, there is need to undertake energy efficiency activities in order to cut down on SME energy budgets.

Based on these findings, the following policy recommendations were proposed: 

1. Create an environment where poor urban households can afford to electric stoves. A low credit scheme or well-planned deferred payment electrification scheme on stoves, for example, can assist to achieve this. 

2. Enable more poor urban households access electricity through new connections. A deferred connection scheme can assist to achieve this.

3. Create an environment where poor urban households afford the cost of house wiring to enable new electricity connections. Like for the first option, a low credit scheme can enable implementation of such a policy option. 

4. Progressively reduce the level of the electricity subsidy 

5. Maintain an electricity lifeline tariff at the ACBT. 

6. Charge electricity consumption of more than 100 kWh per month at cost above the ACBT. The cost of consumption at this level should progressively increase towards the LRMC. 

7. Progressively reduce the electricity subsidy for non-poor households 

8. Introduce energy efficiency programmes in SMEs

If implemented, the policy options will lead to better provision of energy services by adoption of modern energy services by the poor.

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