IDEAS home Printed from https://ideas.repec.org/a/eee/enepol/v75y2014icp179-188.html
   My bibliography  Save this article

The transaction costs driving captive power generation: Evidence from India

Author

Listed:
  • Ghosh, Ranjan
  • Kathuria, Vinish

Abstract

The 2003 Indian Electricity Act incentivizes captive power production through open access in an attempt to harness all sources of generation. Yet, we observe that only some firms self-generate while others do not. In this paper we give a transaction cost explanation for such divergent behavior. Using a primary survey of 107 firms from India, we construct a distinct variable to measure the transaction-specificity of electricity use. The ‘make or buy’ decision is then econometrically tested using probit model. Results are highly responsive to transaction-specificity and the likelihood of captive power generation is positively related to it. At the industrial level, this explains why food and chemical firms are more likely to make their own electricity. Since the burden of poor grid supply is highest on smaller sized and high transaction-specific firms, the grid access policies need to account for firm-level characteristics if government wants to incentivize captive power generation.

Suggested Citation

  • Ghosh, Ranjan & Kathuria, Vinish, 2014. "The transaction costs driving captive power generation: Evidence from India," Energy Policy, Elsevier, vol. 75(C), pages 179-188.
  • Handle: RePEc:eee:enepol:v:75:y:2014:i:c:p:179-188
    DOI: 10.1016/j.enpol.2014.10.003
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0301421514005473
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Williamson, Oliver E, 1979. "Transaction-Cost Economics: The Governance of Contractural Relations," Journal of Law and Economics, University of Chicago Press, vol. 22(2), pages 233-261, October.
    2. Diewert, W E, 1971. "A Note on the Elasticity of Derived Demand in the N-Factor Case," Economica, London School of Economics and Political Science, vol. 38(150), pages 192-198, May.
    3. Claude Ménard & Michel Ghertman, 2009. "Regulation, Deregulation and Reregulation: Institutional Perspectives," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00496216, HAL.
    4. Kenneth Rose & John F. McDonald, 1991. "Economics of Electricity Self-Generation by Industrial Firms," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 47-66.
    5. Bhattacharyya, Subhes C., 2007. "Power sector reform in South Asia: Why slow and limited so far?," Energy Policy, Elsevier, vol. 35(1), pages 317-332, January.
    6. Pasha, Hafiz A. & Ghaus, Aisha & Malik, Salman, 1989. "The economic cost of power outages in the industrial sector of Pakistan," Energy Economics, Elsevier, vol. 11(4), pages 301-318, October.
    7. Barclay, Paulette & Gegax, Douglas & Tschirhart, John, 1989. "Industrial Cogeneration and Regulatory Policy," Journal of Regulatory Economics, Springer, vol. 1(3), pages 225-240, September.
    8. J. Luis Guasch, 2004. "Granting and Renegotiating Infrastructure Concessions : Doing it Right," World Bank Publications, The World Bank, number 15024, August.
    9. Paul L. Joskow & Donald R. Jones, 1983. "The Simple Economics of Industrial Cogeneration," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 1-22.
    10. Bose, Ranjan Kumar & Shukla, Megha & Srivastava, Leena & Yaron, Gil, 2006. "Cost of unserved power in Karnataka, India," Energy Policy, Elsevier, vol. 34(12), pages 1434-1447, August.
    11. Masten, Scott E & Meehan, James W, Jr & Snyder, Edward A, 1991. "The Costs of Organization," Journal of Law, Economics, and Organization, Oxford University Press, vol. 7(1), pages 1-25, Spring.
    12. Finon, Dominique, 2006. "Incentives to invest in liberalised electricity industries in the North and South. Differences in the need for suitable institutional arrangements," Energy Policy, Elsevier, vol. 34(5), pages 601-618, March.
    13. Gulyani, Sumila, 1999. "Innovating with Infrastructure: How India's Largest Carmaker Copes with Poor Electricity Supply," World Development, Elsevier, vol. 27(10), pages 1749-1768, October.
    14. Jae-Cheol Kim & Byong-Hun Ahn, 1990. "On the Economics of Cogeneration: Pricing and Efficiency in Government Owned Utilities," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 87-100.
    15. Alby, Philippe & Dethier, Jean-Jacques & Straub, Stephane, 2010. "Firms operating under infrastructure and credit constraints in developing countries : the case of power generators," Policy Research Working Paper Series 5497, The World Bank.
    16. Pablo T. Spiller, 2009. "An Institutional Theory of Public Contracts: Regulatory Implications," Chapters,in: Regulation, Deregulation, Reregulation, chapter 3 Edward Elgar Publishing.
    17. Williamson, Oliver, 2009. "The Theory of the Firm as Governance Structure: From Choice to Contract," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 6, pages 111-134, December.
    18. Ramesh, S. & Thukral, Kapil & Kaul, Bindu, 1990. "Non-utility captive generation for power sector planning in India," Energy Policy, Elsevier, vol. 18(9), pages 853-860, November.
    19. Faulhaber, Gerald R, 1975. "Cross-Subsidization: Pricing in Public Enterprises," American Economic Review, American Economic Association, vol. 65(5), pages 966-977, December.
    20. D. Finon, 2006. "Incentives to invest in liberalised electricity industries in the North and South. Differences in the need for suitable institutional arrangements," Post-Print hal-00716553, HAL.
    21. Joseph, Kelli L., 2010. "The politics of power: Electricity reform in India," Energy Policy, Elsevier, vol. 38(1), pages 503-511, January.
    22. Klein, Benjamin & Crawford, Robert G & Alchian, Armen A, 1978. "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process," Journal of Law and Economics, University of Chicago Press, vol. 21(2), pages 297-326, October.
    23. Roland Meyer, 2012. "Vertical Economies and the Costs of Separating Electricity Supply--A Review of Theoretical and Empirical Literature," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4).
    24. Abdul-Majeed, Mohammed Arif & Al-Hadhrami, Luai M. & Al-Soufi, Khaled Y. & Ahmad, Firoz & Rehman, Shafiqur, 2013. "Captive power generation in Saudi Arabia—Overview and recommendations on policies," Energy Policy, Elsevier, vol. 62(C), pages 379-385.
    25. W. Coles, Jerilyn & Hesterly, William S., 1998. "The impact of firm-specific assets and the interaction of uncertainty: an examination of make or buy decisions in public and private hospitals," Journal of Economic Behavior & Organization, Elsevier, vol. 36(3), pages 383-409, August.
    26. Kyu Sik Lee & Anas, Alex & Verma, Satyendra & Murray, Michael, 1996. "Why manufacturing firms produce some electricity internally," Policy Research Working Paper Series 1605, The World Bank.
    27. Dismukes, David E. & Kleit, Andrew N., 1999. "Cogeneration and electric power industry restructuring," Resource and Energy Economics, Elsevier, vol. 21(2), pages 153-166, May.
    28. Masten, Scott E, 1984. "The Organization of Production: Evidence from the Aerospace Industry," Journal of Law and Economics, University of Chicago Press, vol. 27(2), pages 403-417, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ghosh, Ranjan & Kathuria, Vinish, 2016. "The effect of regulatory governance on efficiency of thermal power generation in India: A stochastic frontier analysis," Energy Policy, Elsevier, vol. 89(C), pages 11-24.
    2. repec:eee:enepol:v:109:y:2017:i:c:p:659-665 is not listed on IDEAS

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:enepol:v:75:y:2014:i:c:p:179-188. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu). General contact details of provider: http://www.elsevier.com/locate/enpol .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.