Household Effective Demand for Electricity in Ghana: Analysis and Implication for Tariffs

Abstract

Outcomes of most developing country projects to secure inclusive growth through electricity provision appear to hinge on available information regarding households’ response to electricity. To provide the needed information for policy, this study assessed the determinants of household electricity demand and estimated the mean willingness to pay for electricity by households in Ghana. The study used a Contingent Valuation modelling procedure involving over 3000 households to derive an effective demand function for electricity in Ghana. This was done through a national household survey. A mathematical programming analytical procedure was employed to fully account for the block pricing tariff system used in Ghana. The study found that Ghanaian households are willing to pay a monthly mean electricity tariff of 50.40 Ghana cedis (US$11.56), which is lower than the average monthly tariff of 73.67 Ghana cedis (US$16.90) paid by households. Thus, the average tariff paid by households monthly is 46% higher than the mean willingness to pay. The study also found that the highest impact determinants of demand for electricity in Ghana were affordability of tariffs, usage of electrical appliances, and availability of electricity, respectively. This study employs a mathematical programming procedure to determine the mean willingness to pay for electricity in Ghana. This procedure is theoretically more robust than the often-used differential calculus approach since it incorporates the block pricing of electricity in Ghana, which the calculus approach ignores. Also, it uses the largest and most inclusive known sample, specifically designed to elicit households’ willingness to pay for electricity in Ghana. The study is also unique in its findings.