A more rational electricity pricing policy
Of course, from a social and economic point of view, electricity capacity should have been increased a long time ago. Note that the average cost of production drops as we increase capacity and production quantity. That the government has not done this is clearly a policy failure. But given the current situation, can we do something? Increasing prices is a short-term solution; but can we simply increase electricity prices and ignore the impact on poorer households, those that will simply be priced out of the market? Let us look at some possible solutions to this conundrum.
One answer that suggests itself immediately is some kind of differentiated pricing. Let us consider the average usage of a lower income household that has access to electricity.
For all latest news, follow The Daily Star's Google News channel. Assume about six 100-watt light bulbs are in operation for six hours per day and two fans (with similar energy consumption) for 12 hours per day. This gives us a total electricity consumption of about 5 kWh per day or 150 kWh per month. This is a fair description of a low-income household in Dhaka. To make sure we do not leave out too many low-income households (which might vary in terms of size, electricity needs, and capacity), let us set 180 kWh as an upper limit. The lowest rate of electricity should be charged to each household within this range. As long as electricity price per kWh remains at this lowest level minimum, price increases for consumption beyond the 180 kWh per month threshold will not affect them.
Now let us consider the typical electricity consumption pattern for households at the next income level. Running a refrigerator (75 kWh per month), a television (5-6 kWh per month), an iron (10-15 kWh), and more light bulbs and fans would push the consumption amount up to about 1000 kWh per month. The price of electricity for such families should be higher (e.g., base price times 1.5). This price would apply to electricity consumption between the 181st and the 1000th kWh per month.
Upper-middle income households may also have a microwave, a toaster, a laundry machine, a geyser, an additional refrigerator, and perhaps one or more air-conditioners. These would easily move electricity consumption of these households to 2000 kWh per month. Once again, the electricity price would be substantially higher for such families (e.g. the base price times 2.5) for electricity consumption between the 1001st kWh and the 2000th kWh per month.
Finally, upper income households tend to have multiple air-conditioning units, geysers, and outdoor floodlights. These facilities are also heavily used in these households. Hence, electricity consumption of such households would be much more than 2000 kWh per month (let us assume 4000 kWh per month). Obviously, given the price insensitivity of these households, the electricity price needs to be dramatically raised (e.g., base price times 4).
Even at the currently subsidized price of Taka 2.25 per kWh, the electricity bill per month would be Taka 405 (for the lower income household), Taka 3,172.5 (for the middle income household), Taka 8797.5 (for the upper-middle income household), and Taka 26,797.5 (for the upper income household).
The obvious question that suggests itself to any economist is the likely impact of such a scheme on incentives for producers and consumers. For example, not all low-income families have the same minimum needs for electricity. Can we compare a household consisting of a single bachelor with a family of eight? Is it appropriate to price electricity similarly for both of them? Assuming that the average price of electricity would be fixed at a rate close to the average cost of production, the lowest tier family would be paying a price below cost. Would this not encourage the "single bachelor" household to consume too much electricity?
Consider also the fact that below cost pricing would be tantamount to providing financial assistance to these households. However, it would be in-kind assistance; that is, the authorities would be declaring that the assisted households might use this assistance solely for electricity. Does this make sense? Should the household not decide for itself whether to use this subsidy for electricity or food?
These are all legitimate questions. In a perfect world, we would price electricity close to the average cost and help lower-income families with direct money subsidies, instead of in-kind assistance through price-management. However, given the lack of a national information database in Bangladesh, it would be impossible to conclusively determine which families belong to the lower-income stratum. Thus, we have to make do with what we have. What we have suggested is what economists call a "second-best" solution, which may be the "best" solution in our imperfect world.