How to drive energy efficiency in low-income countries

Credit market failures could slow energy efficiency adoption in low-income countries, according to a new research paper titled “Credit, Attention, and Externalities in the Adoption of Energy Efficient Technologies by Low-Income Households.”

A charcoal-burning metal cookstove.

Low-income households face credit constraints in adopting energy efficient technologies, which policymakers may address with financing programs and subsidies, according to the paper. The paper’s authors are Susanna B. Berkouwer, professor of business economics and public policy at the Wharton School, and Joshua T. Dean, professor of behavioral science and economics at the University of Chicago’s Booth School of Business.

Berkouwer and Dean generated these findings during a recent 14-month study of the adoption of energy efficient charcoal cookstoves among 1,018 low-income households around Nairobi, Kenya. They selected a popular brand of energy efficient cookstoves called Jikokoa and offered them to participants at a subsidized price. More than 500 households opted for it. The cookstove is designed with improved insulation for better heat retention.

Using data collected across four survey rounds, the researchers estimated that the households that switched from traditional charcoal cookstoves to the energy efficient alternative saw a 40% reduction in charcoal spending, saving the average household $118 a year. The authors put that in context: Those households have an average monthly income of $120. The Jikokoa cookstove retails for $40, so the savings corresponded to a 300% annual rate of return on investment.

Despite those gains, households without access to credit were willing to pay only an average of $12 up front for the cookstove that retails for $40. But the group with access to credit was willing to pay $25 to buy the stove. 

“The main barrier to adopting the more energy efficient stove is just money,” says Berkouwer. “People don’t have the cash on hand.”

Read more at Knowledge@Wharton.