Blackouts impose substantial economic costs in developing countries. This paper advances a new explanation for their continued prevalence: unlike in high-income countries, where regulatory mandates require utilities to satisfy all electricity demand, utilities in developing countries respond to wholesale electricity prices. As a result, misallocation of output across power plants can decrease the quantity of electricity supplied to end-users. We provide empirical support for this explanation using novel data from India, home to the world’s third-largest electricity sector. In contrast to the developed world, we find that Indian wholesale demand is downward-sloping. Reducing supply-side misallocation would increase electricity supply for the average household by 1.7 percent (enough to power 4.6 million additional households). Justifying a mandate that utilities must satisfy all end-use demand would require consumers to value electricity far above the cost of diesel backup generation. However, such a mandate would likely be cost-effective if paired with supply-side reforms.
Authors
- Acknowledgements & Disclosure
- We thank Severin Borenstein, James Bushnell, Vaibhav Chowdhary, Steve Cicala, Lucas Davis, Meredith Fowlie, Michael Greenstone, Koichiro Ito, Kelsey Jack, Ryan Kellogg, Erin Mansur, Shaun McRae, Nick Ryan, Mar Reguant, E. Somanathan, Rahul Tongia, Frank Wolak, Catherine Wolfram, and seminar participants at Carnegie Mellon, U. Chicago EPIC, Columbia SIPA, U. Illinois, Indiana U., ISI Delhi, U. Miami, U. Maryland, UNLV, UC Berkeley, the Inter-American Development Bank, the AERE Summer Conference, the ASSA Annual Meetings, Camp Resources, the EfD Annual Meeting, the Heartland ERE Workshop, NBER EEE, NEUDC, the SEA Annual Meeting, SETI at Duke, the TREE Seminar, and UC Berkeley Energy Camp for helpful comments and suggestions. Erin Kelley contributed invaluable data acquisition support, and Jessica Jiang, Chinmay Lohani, Garrison Schlauch, and Xiner Xu provided excellent research assistance. Burlig was generously supported by the National Science Foundation's Graduate Research Fellowship Program under grant DGE-1106400 and the Tata Center for Development at the University of Chicago. Preonas was generously supported by Resources for the Future's Joseph L. Fisher Dissertation Fellowship. All remaining errors are our own. The order in which the authors' names appear has been randomized using the AEA Author Randomization Tool (kO-uBJ-nEo6x), denoted by ⓡ. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
- DOI
- https://doi.org/10.3386/w29610
- Published in
- United States of America
