Can the Urban Poor Afford Modern Energy? The Case of Ethiopia

Abstract

Comparing rough measures of costs of using modern fuels and purchasing power of the urban poor in Ethiopia, this article finds that, while kerosene is relatively cheap even for the very poor, electricity is extremely expensive even for the relatively well to do. The upper stratum of the poor may have the purchasing power to access butane gas. In addition, the article examines the relevance of the `energy ladder' hypothesis. Generally, both at the aggregate level and for individual urban areas, the prediction from the hypothesis holds; but our results indicate that the relevance of the hypothesis weakens on lower levels of aggregation implying significant intercity variations. Finally, demand equations for each fuel are econometrically estimated and the elasticities are used to examine price and income effects. The budget elasticities indicate that with economic growth, the demand for traditional fuels will increase. In addition, the cross-price elasticities show that increase in the price of a traditional fuel mainly shifts demand towards other traditional fuels rather than towards modern fuels. This slows down the transition towards modern fuels. The article concludes by presenting policy recommendations arising from the analysis.

Keywords: Urban energy, Modern fuels, Ethiopia

JEL Classification: Q41