Using the Free Market to Expand Access to Electricity

February 26, 2013

For the world's 1.4 billion people without access to electricity, the traditional solution to the problem seeks to improve and expand service from an established monopolistic electricity supplier.  However, free market solutions to electricity development could be more effective at expanding access to electricity, says Paul Ballonoff, a specialist manager in the emerging markets practice of Deloitte Consulting LLP.

  • In many emerging markets, private free market suppliers of electricity are illegal and the established monopolies are often government owned and operated and frequently unreliable.
  • These monopolies are legal monopolies, not natural monopolies, and as such do not compel consumers to voluntarily purchase the regulated monopoly provider's electricity.
  • Instead, consumers opt to pay higher prices for free market insurgent provider s' electricity or consumer-reliable alternatives like kerosene, which have no natural monopoly attached to them.

Worldwide electricity demand is projected to grow by 2.2 annually, driven by developing countries and electric car expansion.

  • Though existing monopolies offer lower prices, competition drives reliability -- a key factor in transitioning developing countries from kerosene and other alternatives to electricity.
  • While counterintuitive, the bottom of the pyramid, which comprises 80 percent of the world's population, has substantial spending power and would willingly substitute current energy sources for electricity, provided that distribution networks and competition make it possible.
  • Electricity consumers pay for reliability more than for volume of electricity.

In current electricity systems, highly regulated grids, artificially low prices and heavy subsidization create prices that do not reflect the real cost to consumers. Even with regulation of principal suppliers in these systems, costs are much higher than regulated costs because consumers have to purchase backup energy to ensure reliability.

Ballonoff proposes that local distribution systems evolve according to local economic conditions and that each local grid be isolated from adjacent grids' instabilities by creating direct current connections as opposed to alternating current connections. Doing so would ensure reliability and harden local distribution systems against system wide failures like the blackouts that India experienced in 2012.

Source: Paul Ballonoff, "Providing Access to Electricity for the Unserved: A Free-Market Solution," Cato Journal, Winter 2013.

 

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