Electricity tariff increase: Impact on residential use

Bangladesh Energy Regulatory Commission (BERC) has officially announced the electricity tariff adjustments on Thursday, March 13, 2014, increasing them by about 7.0 per cent. All media made the headline news on this issue. Both electronic and print media can be identified into three groups on the basis of how they published this news: (i) just the news providing the numerical information on proposed increase of tariffs, (ii) the numerical information plus some 'speculative information' on how the proposed tariff would increase the cost of living and affect investment, and (iii) only the speculative information.
Any speculative information or data should be based on a sound and methodologically carried-out analysis, otherwise, they will be wrong. This analysis should be done by using all avaialable information. In the case of electrcity, one needs to keep the following infomation in mind as a background to analyse the effects of the new electrcity tariffs:
1. Only about 55 per cent of total households have access to electrcity in Bangladesh. The lives of the remianing 45 per cent, who are yet to receive electricity connection, have nothing to do whatsoever with electricity tariff.
2. The tariff on electricity used in the agricultural sector has not been increased, meaning cost of electrcity used in the sector would remain unchanged.
3. The industry sector did not receive any subsidy in the past, so the sector did not benefit at all from the spending of public money to subsidise electrcity.
Along with domestic consumption, the tariff for industrial use of electricity has also been increased in varying rates. Such increase will increase the cost of production and thus increase the cost of living indirectly of all households. However, to what extent the cost of living would increase requires a rigorous analysis. Yet, it would have been better if tariff on industrial use of electricity had not been increased. That being pointed out, the main focus of this article is to assess whether we have a strong case to contest the increase of tariff on residential use.
Any increase in price of a commodity can potentially lead to an increase of the total amount of spending on that commodity. However, if consumption of that commodity decreases with increase of its price, total spending on that commodity may even decrease. For example, if the price of a commodity increases by, say, 10 per cent, and consequently its demand decreases by more than 10 per cent, total spending on that commodity will in fact decrease. Whether cost of consuming a commodity will increase or decrease following a rise in its price depends on the responsiveness of its demand to its price, in economic terminology, on its price elasticity of demand.
As price of electricity is administratively set in Bangladesh, not determined by the market forces, there are some technical problems in estimating its price elasticity. But cross-country experience suggests that the consumption of electricity, as a basic need, usually decreases by a lesser extent than the increase in price implying an overall increase of cost of electricity. But the question is who and to what extent will be affected by such increase.
In simple arithmetic, 45 per cent of the total households, which do not have access to electricity, will not be affected at all by the adjustment of electricity tariffs. Even the remaining 55 per cent of the total households, who have access to electricity, are not evenly distributed by income quintile. According to the Household Income and Expenditure Survey (HIES) 2010, only 31 per cent of the poorest (quintile) households have access to electricity, while the same rate for the richest (quintile) is about 74 per cent (graph 1). It means only 31 per cent of the households belonging to poorest 20 per cent of the country are currently benefited by the electricity subsidy. At the same time, 74 per cent households of the richest 20 per cent are benefited from the same subsidy. In plain words, the benefit of the current electricity is highly regressive and tantamount to oiling the oilers. This provides a strong ground for adjustment of the current electricity tariff on domestic consumption.   
Graph 1: Percentage distribution of households with access to electricity by income quintile

 Following the new tariff structure, monthly electricity bill will increase depending on the level of monthly consumption as follows:
Table 1: Increase of electricity bill as a result of current tariff adjustment  

Along with access to electricity, level of monthly consumption of
electricity also varies across quintiles. About 93 per cent (of those who
have access to electricity) of the poorest quintile consumes less than 100 kwh per month, while this share is 42 per cent for the richest quintile
(table 2).
Table 2: Percentage distribution of households according to monthly electricity consumption by income quintiles

Differential access to electricity and level of consumption jointly would imply that only about 6.0 per cent of bottom 20 per cent of country's households consume up to 100 kwh per month. Assuming a normal distribution, half of them will probably consume less than 50 kwh per month, and their monthly bill not be affected by the tariff increase. Less than 0.5 per cent of the bottom 20 per cent of country's households consumes between 101 and 300 kwh per month.
All these mean that only about 3.5 per cent of total household belonging to the poorest 20 per cent will have to pay some additional amount of money to keep their current level of electricity consumption intact.
This share will increase with level of income and will be the highest for
the richest income quintile, who consume the highest amount of
electricity.
This is not to deny that increase in electricity tariff would increase cost of living but to stress two notable aspects of such increase. First, the increase will affect the rich more compared to the poor. Those consume less than 50 kwh per month would actually not be affected at all. Available information suggests that most of the poor will belong to this consumption slab. Second, even a portion of the poor and marginal households may have to pay more as a result of the tariff structure; their additional burden will be less than that on the rich people.
Should the state avoid tariff adjustment to subsidise the consumption of the rich while depriving about 45 per cent of its total population of access to electricity? The answer should be no, not only on equity but also on moral ground. However, this does not mean that the country should not try to reduce the cost of electricity generation and make strides to increase institutional efficiency of the sector.
Abul Basher, PhD is Researcher at the Bangladesh Institute of
Development Studies (BIDS), former economist, World Bank,
and former faculty, Willamette University, USA.
[email protected]