Consumer Behavior and Demand in Rural India: ISEP-SPI Study

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by Anushka Sharma

 

India is witnessing an energy transformation of elephantine proportions, with half a billion people gaining electricity access between 2000 and 2016. Several efforts have been undertaken both at the center and state levels to achieve the goal of universal household electrification by March 2019. However, this rapid electrification is far from being converted into higher rates adoption and use in rural India due to demand side gaps such as unaffordability and dissatisfaction with the quality of electricity supply.

 

A recent study by ISEP and SPI surveyed 10,000 households and 2,000 rural enterprises in Uttar Pradesh, Bihar, Rajasthan and Odisha to understand consumer behavior towards electricity and demand. The study finds a stark difference in the adoption rates for electricity of households as opposed to enterprises- 75% versus only 65%. The reason for this is mainly credited to the focus of ongoing schemes for rural electrification on households. Also, electricity connections for enterprises are not subsidized, unlike households. In some cases, the connection fee of approximately 2800 INR which is more than the monthly expenditure of some of the enterprises on electricity.

 

Both households and enterprises use a multitude of sources of electricity based on size and activity. The bigger the enterprise or the more affluent the household, the higher the electricity consumption. Most popular source being solar home systems, followed by rechargeable batteries, mini-grid electricity and diesel generators for the households. The source of electricity for enterprises varies based on the type of activity they are engaged in, majority of retail trade based enterprises use grid electricity, service based enterprises such as flour mills prefer more expensive sources of electricity such as diesel generators due to higher reliability and high wattage motor loads. Most enterprises engaged in repair services such as tailoring shops do not use electricity at all.

 

Among the four states surveyed, Uttar Pradesh has the lowest adoption rate 58% for households and only 44% for enterprises, while Odisha does particularly well at 90% and 94% respectively. The reasons cited in the survey for lack of usage of grid electricity are affordability, difficulty in getting a grid connection and inadequate and unreliable supply. Added reasons for not using grid electricity in Uttar Pradesh were a high share of unmetered connections and irregular billing. Also, since grid electricity is only available for just over half the day on an average in the four states, the need to rely on back up sources increases expenditure of the individuals, thus reducing grid electricity’s attractiveness for consumers.

 

Dissatisfaction with grid-electricity has come out on top as one of the reasons to not use it. In Uttar Pradesh and Bihar almost 50% users are unhappy with grid electricity, while in Odisha, three quarters are satisfied. A lesson should be learnt from Odisha- higher levels of satisfaction are associated with longer hours of power supply (19 hours on a typical day in Odisha), fewer instances of voltage drop and timely billing. A key factor that sets Odisha apart is the fact that many parts of the state are served by private distribution franchisees. The pressing concerns for consumers who aren’t satisfied with grid electricity are quality, reliability, adequacy, affordability and redressal services in particular.

 

Achieving higher rates of satisfaction with the consumers is necessary because otherwise, a vicious cycle can be set in place. A dissatisfied consumer has a lower willingness to pay his/her bills on time leading to poorer services and a negative perception of current users hinders adoption by prospective new consumers.

 

A comparison with mini-grid electricity users shows that even though they are able to avail electricity for only 7 hours a day as opposed to 12 hours of power supply to grid users, they are more satisfied because they get uninterrupted supply in the evening hours, along with easy redressal and reliable supply.

 

Electricity access was evaluated with the help of Multitier Matrix. The share of Tier 1 and Tier 2 households is higher in Uttar Pradesh and Bihar. In contrast, more than two-thirds of households in Odisha and Rajasthan fall in Tier 3 and above.

 

Another aim of the study was to delve into the factors that drive electricity demand in rural households. A simple linear regression analysis shows that economic status of the household, education level of the head of the household and hours of grid electricity supply directly affect consumption of electricity. Also, primary source of household income is an explanatory variable for electricity consumption, households with salaried jobs or businesses as the primary source of income tend to have a higher electricity consumption as opposed to those who rely on agriculture or labor income.

 

Similarly, electricity demand for rural enterprises is driven by education level of owner, hours of electricity supply. The higher the two factors, the more the electricity consumption. Demand is also affected by scale of operation of the enterprise- larger the enterprise, higher the demand and nature of commercial activity- motor based and technology driven enterprises tend to have a higher consumption of electricity.

 

Providing electricity to every household is a huge milestone the government is trying to achieve through its programs, however, the ultimate goal of 100% adoption will only be achieved once the demand side gaps are removed. Steps such as focus on lower income households as well as rural enterprises for future electrification should be taken since they attractive consumers for the utility providers as well. A major hindrance to grid-electricity adaption is unreliability and lack of redressal. These problems can be targeted by universal meter coverage, time billing and payment collection and adopting a “consumer first” approach to electricity provision.

 

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Anushka Sharma is an undergraduate student of Economics at the University of Delhi, India and an ISEP student fellow.