Does Increasing Block Pricing Work in Low-Income Countries? A Bunching Analysis of Electricity Billing Data from Ethiopia

Increasing block pricing is a popular tariff structure for pricing electricity and water services with the ambition to subsidize low-income consumers, encourage resource conservation, and recover costs. Using the bunching method, we empirically test whether households respond to marginal prices within increasing block electricity pricing and analyze its implications on electricity conservation and subsidy incidence in the context of a low-income country. To this end, we use administratively recorded monthly billing data for over 260,000 post-paid electric meters in Addis Ababa, covering the entire duration of 2015–2018. We find evidence that households respond to marginal prices in the block pricing structure. However, our results show that the impact on electricity conservation is minimum and the block pricing fails to effectively target subsidies to the poor under the existing price structure and cost of electricity generation. The distortion in subsidies is worse for poor households with shared connections