Climate Adaptation in Distorted Electricity Markets

Rising temperatures increase demand for electricity-intensive cooling, yet in many low- and middle-income countries individuals are making adaptation decisions in electricity markets characterized by highly subsidized prices, weak enforcement of bill payment, and high distribution losses. We study household response to extreme heat in Karachi, Pakistan and find that informal electricity consumption —commonly characterized as theft or unbilled consumption—serves as an important adaptation mechanism for poor households. As temperatures rise, households increase both formal (billed) and informal (unbilled) electricity consumption, but the latter is more responsive to increasing temperatures. Heat shocks therefore expand a pre-existing fiscal distortion by increasing losses when system demand peaks. We examine the rollout of theft-resistant cables, which raise the effective cost of consuming cooling services. These cables reduced unbilled consumption across temperature ranges and the reduced cooling was associated with an increase in household health expenditures. At the same time, industrial and commercial consumers benefit from theft reductions and the resulting reliability improvements. These findings illustrate the complex tradeoffs between the adaption of poor households and broader society.