FKP hosted by ANU Indonesia Project and The SMERU Research Institute with speaker Imelda (Associate Professor, Geneva Graduate Institute). Friday, 19 January 2023.

In recent decades, there has been a growing trend among developing countries towards prepayment systems for utilities, such as electricity. These systems can enhance the revenue recovery of utility providers, but their welfare effects on consumers are unclear. Previous research has suggested that paying in advance reduces consumption, but the mechanisms behind this effect are not well explained.

To investigate how prepayment influences consumption through price salience in Indonesia, both in the short and long run, Imelda (Associate Professor, Geneva Graduate Institute) and collaborators conducted a quasi-experiment involving variation in electricity tariff changes. The research asks whether the default program of prepaid electricity metering welfare improving, and if so, what is the channel?

The research  hypothesis is that the prepayment systems increase price salience, resulting in more elastic electricity demand relative to users of post-payment systems. The reasoning is that prepayment systems require customers to make an upfront payment, which creates a more direct and immediate financial incentive to conserve energy and reduce consumption.

To test this hypothesis, annual data from an Indonesian utility company at the service unit level for the years 2013-2020 was utilized. During this period, there was a significant increase in prepaid meter conversion, and, on the top of that, the government removed price subsidies for some classes of customers. The research involved an event study on customers before and after the tariff changes, and a difference-in-difference methodology comparing two similar customer group facing similar tariffs at the start but experiencing different tariff changes after 2013. The control group customers are plausibly a suitable counterfactual to the treated customers in the absence of tariff changes as they live within the same regions, under the same power consumption limit, and under a similar share of prepaid penetration rate. But while the treated customers experienced tariff changes, the control did not.

The study found compelling evidence that prepaid users are up to four times more elastic than postpaid users. The estimated price elasticity declines smoothly for prepaid users, from -0.15 after one year to -0.46 after six years. This means that a one percentage point increase in price will reduce electricity consumption by 0.15 point after one year, and 0.46 point after six years. Postpaid users display an elasticity of -0.04 to -0.08, which means they reduce electricity consumption much less than prepaid users.

The second component of the study involved an online willingness-to-pay survey among prepaid and postpaid meter users with home residences in cities in Central and East Java in Indonesia. The survey suggests positive consumer welfare and our applied welfare analysis highlights the gains from the prepayment system.

The draft paper of this study can be download the paper from this link.