“Kadogo” kerosene vs “Lumpsum” LPG: Trade-offs and cost/benefit analysis

By | June 10, 2012

Following a fascinating conversation with @bankelele and @majiwater on Twitter regarding the cost of kerosene, pay as you go models and relative benefits of each, I’ve been inspired to write this post exploring the topic further.

Before I proceed, I’d like to take a moment to clarify what the “Prepaid” in the title of this blog means: it is not so much the literal meaning of the word, as in you have paid in advance, although that is a part of the business model, but refers to the inherent flexibility built into the “pay as you go” business models. That is, the end user has a significant degree of control over the timing of a payment, the amount paid, the periodicity and frequency of such payments and that each time payments can be of different amounts. This underlying element of flexibility over time and money is what has made the prepaid business model so attractive and thus successful, among the majority of the world’s population on who manage on irregular income streams from a variety of sources.  For those interested in diving into this finding further, you can read posts tracking the original field research in 2009 by using the category of “user research” on this blog.

The conversation this morning however was on the patterns of purchase observed in household energy consumption – kerosene and liquid petroleum gas (LPG) as well as which offered a better ROI, intermingled with class/status associated with choice of fuel and its availability in urban vs. rural areas. The following discussion is based on the Kenyan context but the exploration of cost/benefit and the flexibility inherent in business models for each, are of relevance to the larger discussion on payment plans for the informal economy.

Lumpsum LPG versus “Kadogo” Kerosene

One of the reasons that kerosene is so hard to dislodge as the fuel of choice among lower income populations (or, as may be the case, based on further research, “lower middle class” behaviour rather than income per se) is that it can be purchased on demand, on a pay as you go basis. That is, it can be purchased by quantity (as little as 1/4 litre) or cash amount (give me 50 Ksh worth of kerosene) as and when required. There is no imposition on the customer to purchase any fixed minimum quantity or cash amount.

LPG comes in cylinders of fixed sizes, that is the quantity and its cost is already preset, although one can see a wider range of smaller sizes across the developing world, offering a greater amount of flexibility than the single size/cost of the standard LPG cylinder more popular elsewhere.  Thus, it requires a “lumpsum” to be available – either for first purchase or for a refill, although, over the duration of use, it provides a better return.

There is a discussion here that can happen on the “poverty premium” imposed by the lack of such lumpsums of cash available to those who manage on more irregular incomes, thus forcing them to use a more expensive fuel only due to the flexibility of its business model.

This morning we looked at actual numbers, from Nairobi where kerosene retails at 100 Kenyan shilling per litre while the average LPG cylinder purchase is around 4000 Ksh.  Those who use kerosene as their “fast cooking” fuel, as opposed to slower charcoal for their primary cooking, still end up requiring a litre a day – that’s 3000 shillings a month, while the cylinder costing 4000 Ksh can be made to last for 3 months before requiring a refill. Refills cost 2000 Ksh.

This seems to imply that choosing LPG over kerosene is a no-brainer, and in fact, this cost benefit comparison was shared with me by Felix, who has often worked for me in the capacity of local guide and driver. He’s a taxi driver by trade, however, and its more likely that he will have available the lumpsum cash required for LPG purchase. For someone whose income sources do not offer the same quantity of lumpsums (smaller daily cash flow and transactions), this may not be a viable, though cheaper, option, forcing them to purchase more expensive kerosene simply due to the cash in hand constraints.

Another factor that plays here is urban fuel use patterns as opposed to rural. While the daily juggling between “fast cooking” and “slow cooking” items is the same, i.e. use cheaper fuel for things that take longer to cook and expensive fuel for speed or convenience (morning tea before rushing to work), those in small market towns and rural areas tend towards a combination of firewood and charcoal, while the housing layouts and structures force urban dwellers to use charcoal and kerosene.  Firewood is forbidden and/or simply not available as it is on the shamba.

Again, as we know, long standing habits and behaviour migrate along with people, however, there may be interesting findings in taking a closer look at why existing behaviour is so hard to change and the correlating influence of business models.

One has heard this morning, however, that there is a pilot program in Nairobi which is testing the pay as you go / on demand purchase model even for LPG refills. This will be an interesting program to observe and I hope to be able to do so in the coming weeks.

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