The Relationship between Electricity Prices and Household Welfare in South Africa

Abstract

The study examines the relationship between electricity prices and household welfare in South Africa. The study employs a demand system framework on annual time-series data from 2000 to 2018 and the analysis involves the calculation of price elasticities and measurement of welfare changes. The price elasticities in this study are drawn from the linear expenditure demand model. To analyse welfare change, we consider the impact of electricity pricing policies on cost of living (proxied by the consumer price index and households’ expenditure patterns). The study achieves this: (i) by comparing electricity price movements to changes in the rate of inflation between 2000 and 2018; (ii) by regressing total household energy expenditure against household expenditure on electricity, to examine how electricity costs affect a household’s overall energy bills; and (iii) thirdly, by regressing household food expenditure against households’ electricity expenditure to determine how the latter affects a household’s ability to spend on other basic goods and services. The results of the study show: (i) South African household electricity demand is inelastic to changes in price of electricity; (ii) electricity prices in the country increased at a higher rate than the rate of inflation for most of the time during the study period, suggesting that households incurred increased expenditures to achieve their desired utility or satisfy their energy needs during this period; (iii) household total electricity expenditure is positively related to household total energy expenditure, implying that high household expenditure on electricity exerts upward pressure on the overall household energy budgets; and (iv) household total food expenditure is negatively related to household total energy expenditure. This shows that while policy makers achieved significant success with providing physical access to electricity, affordable access to this basic service is still a concern and affects the overall welfare of households in the country. The study recommends a review of the country’s electricity tariff structure to make affordability a key objective. Moreover, the study calls for coordinated efforts in addressing Eskom challenges which have also played a contributing role to the current energy crisis, characterized by an unreliable electricity supply and constantly increasing electricity prices.