Outage Loss Differentials and Self-Generation: Evidence from African Business Enterprises
Musiliu O. Oseni & Michael Pollitt
University of Cambridge Judge Business School, UK, Phone +447435159053, Email: ;
Overview
The importance of electricity supply to economic development cannot be overemphasised.Access to reliable electricity supply increases the productivity and welfare of society. To business enterprises, electricity serves as an indispensable input. Apart from its necessity for running many industrial machines, its contributions to the productivity of human capital are enormous. It contributes greatly to product marketing. In many cases, electricity plays important roles in storing finished goods ahead of demand, and therefore enhances consumers’ satisfaction by assisting in making the goods available to consumers when needed. Despite the necessity of electricity to business growth however, poor electricity supply has been a major constraint to business enterprises in Africa. Some of the impacts of this poor provision include low productivity, poor competitiveness of the output produced in the continent, and low capacity expansion. To cope with this challenge however, many firms now embark on backup generation to mitigate the costs of power outages to their operations.However, it is not clear whether firms who invests in backup generation suffer smaller unmitigated outage losses relative to those without self-generation.
The paper is organised as follows: After the introduction, the next section presents the relevant literature. Section 3 presents the theoretical and empirical frameworks. Section 4 discusses the data.This is followed by a discussion of the empirical results in Section 5. The last section describes the conclusions.
Methods
Endognous switching regression
Results
We find that though firms possessing certain characteristics tend to invest in self-generation, they still suffer greater unmitigated outage losses than firms without self-generation. This outage loss differential reflects differences in the vulnerability of firms’ operations to power outages and the lack of adequate investment in self-generation relative to firm’s required loads.
Conclusions
First, it would be beneficial if firms whose operations are more vulnerable to power outages could (or are allowed to) partner with electricity suppliers such that they get preferential supply. This arrangement could be in the form of a (binding) contract between vulnerable firms and the utility companies, such that they are offered preferential supply at an agreeable (insurable) optimal tariff but get compensated by the utilities in the events of defaults. This would lessen the effects of unreliability in electricity supply on firms’ operations and reduce the constraints posed on their capacity expansion by power outages.
Secondly, the unmitigated outage losses for both the backup and non-backup firms are substantial, suggesting that firms are likely to benefit from cost-reflective tariffs that ensure reliability. Thereforegovernment should be more committed to its reform policy and embark on the removal of subsidy on industrial and commercial electricity tariffs to encourage the private investors’ participation in the industry. This will solve the problem of inadequate generating capacity and also reduce the capacity constraints posed to firms by poor power supply. The money realised from the subsidy removal can also be used to finance another project such as free school feeding, improved health cares, etc. However, this removal has to be done with caution.
References
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Bhattacharyya, S. C. (2007). Power sector reform in South Asia: Why slow and limited so far? Energy Policy, 35(1), 317–332.
Beenstock, M., Goldin, E., & Haitovsky, Y. (1997). The Cost of Power Outages in the Business and Public Sectors in Israel : Revealed Preference vs . Subjective Valuation. Energy Journal, 18(2), 39-61.
Steinbuks, J., & Foster, V. (2010). When do firms generate? Evidence on in-house electricity supply in Africa. Energy Economics, 32(3), 505–514.