Demand for Electricity and Benefits from Rural Electrification: Evidence from Kabupaten Musi Banyuasin (Muba)

Rural electrification programs are often the preferred policy to promote rural development in developing countries where many continue to live without access to electricity. This paper investigates household demand for electricity and potential economic benefits from a prospective rural electrification program, using data from a survey of households in Musi Banyuasin (Muba) District in South Sumatra. Electrification is defined as a move from unelectrified and nongrid sources, including those with generators toward grid electricity. First, determinants of electricity demand, including household socio-characteristics, are examined using an input demand equation. Second, potential economic benefits are estimated by using the concept of derived demand for electricity and consumer surplus analysis developed by the World Bank (2002). The paper also describes the survey findings on the types of energy currently used at home, current energy expenditures, and attitudinal responses regarding ability and willingness to pay. We found that both generator set and unelectrified households, which must pay high costs to generate electricity, look forward to grid electrification and that for the majority of unelectrified households the ability to pay is not an issue. Further, large increases in consumer surplus would result from the increase in demand for lumen and for information/entertainment when their prices decrease with electrification. The main conclusion is that rural electrification programs can generate considerable economic benefits that justify the cost.