Are credit constraints limiting demand for electricity? Evidence from Rwanda

Policy Context

Are market frictions suppressing consumer demand for electricity among rural, low income populations in Rwanda? Megan partners with a private solar firm in Rwanda to randomly offer a solar-specific line of credit to current customers and compares the results of that line of credit with the flat fee structure offered to another group of customers. The line of credit will theoretically reduce market frictions that could be distorting consumer willingness to pay for electricity, and thereby allows her to better differentiate between consumer value and market frictions as determinants of electricity demand.

Study Design

I randomly offer 2,000 rural Rwandese consumers a line of credit for electricity payments that simultaneously lowers liquidity constraints and transaction costs.

Results and Policy Lessons

Twenty percent borrow and demand for the credit is inelastic; however, it does not change demand for electricity. The primary mechanism appears to be time savings: consumers taking the line of credit make 8%–18% fewer transactions. The results strengthen arguments supporting prepaid utility contracts but highlight opportunities to provide greater flexibility for consumers without lowering firm profits.