The Economic Costs of Unsupplied Electricty: Evidence from Backup Generation among African Firms
Public electricity provision in Africa has been marred by under investment and frequent power outages.One of the strategies often adopted by firms to cope with this poor public supply is investment in backup generation. This strategy is not without cost however. Extant literatures on outage cost estimation have shown that firms possessing certain characteristics have a higher tendency to invest in backup generation. What is less known, however, is whether those firms suffer lesser or higher unmitigated outage losses (costs). Using cross-sectional data from 6854 firms currently operating in 12 African countries, this study investigated the extent to which firmsâ€™ characteristics might create incentives for auto-generation and whether these incentives lead to lesser unmitigated outage costs.We used three different methods including marginal cost, incomplete backup and subjective evaluation techniques. The results reveal that large firms, firms engaging in exports, and those using the Internet for their operationstill suffer higher unmitigated outage costs despite having a higher propensity of investing in backup generation. The results further reveal that unmitigated costs still account for the larger proportion of the total outage costs despite high prevalence of backup ownership among the firms. This reflects the inefficiency in backup generation due to small backup capacity held by firms. Our estimates also indicate that ignoring firms'characteristics such as size and the nature of operation (e.g. export promotion, internet usage, etc.) may result in underestimation of outage losses. The analysis further suggests that firms can still benefit significantly even when the current subsidised tariffs are replaced by cost-reflective rates that ensure stable electricity supply. The net outage cost (having adjusted for a cost-reflective tariff) incurred by firms are large enough to expand their scope of operation and hire more workers, suggesting the macroeconomic effect could be significant.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Klaus Gugler & Dennis C. Mueller & B. Burcin Yurtoglu, 2007. "Corporate Governance and the Determinants of Investment," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 163(4), pages 598-626, December.
- Karekezi, Stephen & Kimani, John, 2002. "Status of power sector reform in Africa: impact on the poor," Energy Policy, Elsevier, vol. 30(11-12), pages 923-945, September.
- DeCanio, Stephen J, 1998. "The efficiency paradox: bureaucratic and organizational barriers to profitable energy-saving investments," Energy Policy, Elsevier, vol. 26(5), pages 441-454, April.
- Beenstock, Michael, 1991. "Generators and the cost of electricity outages," Energy Economics, Elsevier, vol. 13(4), pages 283-289, October.
- Pablo Serra & Gabriel Fierro, 1996.
"Outage Cost in Chilean Industry,"
Documentos de Trabajo
10, Centro de Economía Aplicada, Universidad de Chile.
- Richard S.J. Tol, 2007. "The Value of Lost Load," Papers WP214, Economic and Social Research Institute (ESRI).
- Michael L. Telson, 1975. "The Economies of Alternative Levels of Reliability for Electric Power Generation Systems," Bell Journal of Economics, The RAND Corporation, vol. 6(2), pages 679-694, Autumn.
- Adenikinju, Adeola F., 2003. "Electric infrastructure failures in Nigeria: a survey-based analysis of the costs and adjustment responses," Energy Policy, Elsevier, vol. 31(14), pages 1519-1530, November.
- Foster, Vivien & Steinbuks, Jevgenijs, 2009. "Paying the price for unreliable power supplies : in-house generation of electricity by firms in Africa," Policy Research Working Paper Series 4913, The World Bank.
- Jens Matthias Arnold & Aaditya Mattoo & Gaia Narciso, 2008.
"Services Inputs and Firm Productivity in Sub-Saharan Africa: Evidence from Firm-Level Data,"
Journal of African Economies,
Centre for the Study of African Economies (CSAE), vol. 17(4), pages 578-599, August.
- Arnold, Jens Matthias & Mattoo, Aaditya & Narciso, Gaia, 2006. "Services inputs and firm productivity in Sub-Saharan Africa : evidence from firm-level data," Policy Research Working Paper Series 4048, The World Bank.
- 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.
- LaCommare, Kristina Hamachi & Eto, Joseph H., 2006. "Cost of power interruptions to electricity consumers in the United States (US)," Energy, Elsevier, vol. 31(12), pages 1845-1855.
- Munasinghe, Mohan, 1981. "Optimal electricity supply : Reliability, pricing and system planning," Energy Economics, Elsevier, vol. 3(3), pages 140-152, July.
- Newey, Whitney K., 1987. "Efficient estimation of limited dependent variable models with endogenous explanatory variables," Journal of Econometrics, Elsevier, vol. 36(3), pages 231-250, November.
- Anderson, Roland & Taylor, Lewis, 1986. "The social cost of unsupplied electricity : A critical review," Energy Economics, Elsevier, vol. 8(3), pages 139-146, July.
- Sanghvi, Arun P., 1983. "Optimal electricity supply reliability using customer shortage costs," Energy Economics, Elsevier, vol. 5(2), pages 129-136, April.
- Leahy, Eimear & Tol, Richard S.J., 2011.
"An estimate of the value of lost load for Ireland,"
Elsevier, vol. 39(3), pages 1514-1520, March.
- Reinikka, Ritva & Svensson, Jakob, 2002. "Coping with poor public capital," Journal of Development Economics, Elsevier, vol. 69(1), pages 51-69, October.
- Raza, Syed Ali & Ali, Syed Adeel & Abassi, Zia, 2011. "Effect of corporate income tax and firms’ size on investment: evidence by Karachi stock exchange," MPRA Paper 36800, University Library of Munich, Germany.
- Steinbuks, J. & Foster, V., 2010. "When do firms generate? Evidence on in-house electricity supply in Africa," Energy Economics, Elsevier, vol. 32(3), pages 505-514, May.
- Mohan Munasinghe & Mark Gellerson, 1979. "Economic Criteria for Optimizing Power System Reliability Levels," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 353-365, Spring.
- Benjamin Bental & S. Abraham Ravid, 1982. "A Simple Method for Evaluating the Marginal Cost of Unsupplied Electricity," Bell Journal of Economics, The RAND Corporation, vol. 13(1), pages 249-253, Spring.
- Michael Beenstock & Ephraim Goldin & Yoel Haitovsky, 1997. "The Cost of Power Outages in the Business and Public Sectors in Israel: Revealed Preference vs. Subjective Valuation," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 39-61.
- Willis, K. G. & Garrod, G. D., 1997. "Electricity supply reliability : Estimating the value of lost load," Energy Policy, Elsevier, vol. 25(1), pages 97-103, January.
- Tishler, Asher, 1993. "Optimal production with uncertain interruptions in the supply of electricity : Estimation of electricity outage costs," European Economic Review, Elsevier, vol. 37(6), pages 1259-1274, August.
When requesting a correction, please mention this item's handle: RePEc:cam:camdae:1351. 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: (Jake Dyer)
If references are entirely missing, you can add them using this form.