Note: This is a joint blog post with Meir Alkon (Princeton University) and S.P. Harish (New York University).
Can the poor afford modern energy? In India, the answer is yes. When electricity and liquid fuels are available, Indian households are ready to put relatively high proportions of their expenditure towards these sources of energy. This high willingness to pay suggests that improving access to modern energy can generate large benefits for the population.
As access to modern fuels improves in the developing world, affordability becomes an increasingly important issue. Even if households can access abundant quantities of energy, they may not be able to afford this newly available energy. Access to modern fuels does not guarantee that households will reap benefits from improved lighting, electric appliances, mechanical power, or cleaner cooking.
Survey research suggests that the cost of energy is a major burden for households in many developing countries. In Bangladesh, over 40% of households spend more than 10% of their total income on energy (gated content). In India, the problem is even worse, as the average household spends 13% of its income on energy (ungated pre-print).
To understand patterns and drivers of energy affordability, our new study (forthcoming, Energy for Sustainable Development; ungated pre-print) analyzes changes in household energy expenditures over time, using nationally representative data from India. Combining household surveys between the years 1987 and 2010, we described and predicted the affordability of household energy across the country.
The findings show that high energy expenditures have many causes. At the state level, pricing reforms of energy – in particular, electricity – seem to impose a heavy burden of increased energy expenditure on households. While urban households have steadily reduced their energy expenditure relative to total disposable income, we observe no such positive change among rural households.
At the household level, modern energy access is a key driver of energy expenditures. As households gained access to electricity or liquid fuels for cooking, their expenditures increased by almost 50 percent.
On the other hand, rising incomes do not appear to explain growing energy expenditures. In fact, household energy expenditures are negatively correlated with other expenditures, though the correlation is very weak.
This result suggests that households consider energy a highly valuable commodity. They are willing to spend significant amounts of money on energy, despite limited disposable income. Even very poor households are willing to forgo other goods and services if modern energy is available to them.
If access to modern energy is highly valued across the Indian population, then the policy implication is that the government should prioritize access over reducing energy prices. People’s high willingness to pay for modern energy suggests that the lack of access remains the key issue. This is not to suggest that energy prices do not matter or that poor Indian households would always continue to pay a high proportion of their income towards their energy needs. What our study shows is that, across both rural and urban households, energy access remains a much more critical issue compared to its cost.
When poor households lack access to electricity and liquid fuels for cooking, the socio-economic cost is high. Thus, the goal of universalizing modern energy access in countries without such universal access remains an important policy priority.