The South African government is introducing a poverty-reduction policy that will supply households with a monthly 50 kWh free basic electricity (FBE) subsidy. We show that FBE distorts the energy choices of poor households by encouraging them to cook with electricity, whereas alternatives such as liquefied petroleum gas (LPG) can deliver a similar cooking service at a much lower cost to society. An alternative energy scheme, such as providing households with clean energy credits equivalent in value to the FBE's cost, could deliver additional energy services worth at least 6% of total household welfare (and probably much more) at no additional public cost; those benefits are so large that they would cover the entire cost of LPG fuel needed to implement the scheme. The analysis is extremely sensitive to the coincidence of electric cooking with peak power demand on the South African grid and to assumptions regarding how South Africa will meet its looming shortfall in peak power capacity. One danger of FBE is that actual peak coincidence and the costs of supplying peak power could be much less favorable than we assume, and such uncertainties expose the South African power system to potentially very high costs of service.

This report examines the connections, if any, between efforts to enhance development through electrification of the world's poorest households with the parallel efforts to introduce market forces in the power sector. Advocates for equitable economic development have rightly signaled many concerns about the process of electricity reform. Their fears range from the higher prices that often accompany reform to the concern that private firms motivated for profits will not have an incentive to provide public services. Some of these fears have been articulated by implying the existence of a "golden era" when state owned firms dominated the power sector and provided energy services equitably across societies; in fact, that golden era never existed in most countries. Public utilities traditionally have been highly politicized; in many countries they have concentrated their services on urban elites and often neglected the poorest populations.

The South African government is introducing a poverty-reduction policy that will supply households with a monthly 50kWh "Free Basic Electricity (FBE)" subsidy. We show that FBE distorts the energy choices of poor households by encouraging them to cook with electricity, whereas alternatives such as liquefied petroleum gas (LPG) can deliver a similar cooking service at a much lower cost to society. An alternative energy scheme, such as providing households with clean energy credits equivalent in value to the FBE's cost, could deliver additional energy services worth at least 6% of total household welfare (and probably much more) at no additional public cost; those benefits are so large that they would cover the entire cost of LPG fuel needed to implement the scheme.

The analysis is extremely sensitive to the coincidence of electric cooking with peak power demand on the South African grid and to assumptions regarding how South Africa will meet its looming shortfall in peak power capacity. One danger of FBE is that actual peak coincidence and the costs of supplying peak power could be much less favorable than we assume, and such uncertainties expose the South African power system to potentially very high costs of service.