FROM THE OFFICE OF THE CHIEF ECONOMIST, AFRICA REGION


TALKINGPOINTS
ON ENERGY
Nigeria’s recent “bold” move on removal of subsidies on petroleum has reinvigorated policy
discussions on energy subsidies in developing economies due to the associated high fiscal
burden, and environment footprints resulting from excess consumption of the subsidized
products. However, there is a dearth of evidence on the extent to which energy subsidies a ect
consumption.

A recent paper by Justice Tei Mensah and co-authors “Energy Demand during a Pandemic:
Evidence from Ghana and Rwanda,” presents evidence on the extent to which electricity
subsidies a ect consumption, by leveraging administrative data on electricity billing records from
Ghana and Rwanda: two countries with di ering policies in the electricity sector in during the
COVID-19 pandemic. Ghana o ered electricity subsidies to households to cushion the e ects of
the pandemic on households while Rwanda did not.

The key findings from the paper include:



                  Compared to the pre-covid period, average electricity consumption for the
                  residential sector increased in both Ghana and Rwanda, albeit the rate of
                  increase was significantly higher in the former than the latter. Specifically,
                  average household consumption increased by about 23% in Ghana
                  compared to 4% in Rwanda.
                  The substantial increase in electricity consumption in the residential sector in
                  Ghana was primarily driven by the electricity subsidies o ered.


                                             Fig A: E ects of electricity subsidies on consumption in Ghana


                                        8
   Changes in electricity consumption




                                                 First round                             Second round
                                        7
                                                 of subsidies                             of subsidies
                                        6
                                        5
                                        4
                                        3
                                        2
                                        1
                                        0
                                        -1

                                             0        1          2        3          4          5       6     7   8
                                                                Months relative to start of Covid Lockdown

                                                                       Lifeline Customers (100% Subsidy)
                                                                       Non-Lifeline Customers (50% Subsidy)
   The figure shows the changes in electricity consumption in the respective months following the
   start of the COVID lockdown in Ghana (April 2020). The estimates are di erence-in-di erence
   estimate and their corresponding 95% confidence intervals are computed usinf the expression:
                  1
   DIDω= β  ˆω   −_          ˆω
             2020 2 ∑ k=2018 βk
                      2019




                           POLICY IMPLICATIONS
                               While subsidies, particularly during periods of severe economic crunch, may be desirable,
                               implementation and targeting of such subsidies is crucial in maximizing social welfare.

                               Universal application of [electricity] subsidies, can lead to unintended consequences,
                               including but not limited to high fiscal burden, excess consumption, and leakages. Instead,
                               cash transfers to targeted households could yield optimal outcomes.