Tuesday, February 12, 2019

15 February 2019: Out-of-merit costs and blackouts: Evidence from the Indian electricity market

Louis Preonas
University of Chicago

In the United States, demand for electricity among utilities in the wholesale spot market is assumed to be perfectly inelastic. Consumers therefore face power outages only as a result of infrastructure failure – never because a utility does not purchase enough electricity to satisfy demand. This also implies that inefficiencies on the generation side of the market which raise price do not impact quantity consumed by retail customers. In this paper, we provide evidence that utilities participating in the Indian wholesale market are extremely price elastic: as prices rise, they purchase less power on the wholesale market, meaning that load shedding increases. Using data on plant-specific marginal costs, we document substantial deviations from first-best electricity generation, half of which can be explained by plant outages. These inefficiencies increase the wholesale price, and therefore contribute substantially to rampant blackouts.

Date: February 15, 2019
Time: 11:30 A.M.

Seminar Room 2,
Indian Statistical Institute Delhi Centre,
7, S. J. S. Sansanwal Marg,
New Delhi-110016 (INDIA)


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