Energy Subsidies and Costs in Urban Ethiopia: The Cases of Kerosene and Electricity

Abstract

Making energy affordable to the poor is a widely cited reason for subsidies. Whether subsidies achieve this objective is rarely analysed. In this article, the significance of kerosene and electricity subsidies in relation to the purchasing power of Ethiopian urban households is examined. The results indicate that subsidies on kerosene prices and electricity tariffs do not significantly change the overall costs for households. Even poor households on the average have the purchasing power to access unsubsidised kerosene. The overall costs, including fixed costs, of accessing electricity are very high relative to purchasing power even for the well to do urban households if down payments are made. But when costs are spread over the lifespan of fixed components, even the average poor have the purchasing power to access electricity. These results underscore the importance of a mechanism that spreads fixed costs over longer periods of time. Spreading fixed costs over electricity bills and providing credit facilities are two options that can ameliorate the condition.

Keywords: Energy subsidies, Energy costs, Ethiopia, Urban poor, Poverty alleviation

JEL Classification: Q40, I32