Evaluating the cost to industry of electricity outages

ABSTRACT

The unreliability of electricity supplies is a major cause of the high cost of manufacturing in developing countries. In this paper, we propose a more accurate approach, the contribution method, to measure the cost imposed by power outages. We employ a rich, if not unique, set of data from the detailed operating accounts of three large manufacturing enterprises in Nepal. Estimating the true opportunity costs to the enterprises from lost production caused by power outages sheds light on the issue of cost measurement that is critical for the determination of the feasibility of mitigating measures. Furthermore, having such micro-based information on the value of lost load per kWh by firm or sector is critical for reducing the economic costs of planned outages by the electric utility.

KEYWORDS:

• Electricity
• industry
• opportunity costs
• outages
• reliability

Notes

¹ It should be notified here that the objective of an enterprise is not how or whether to improve the reliability of the power supply system. In fact, the reliability is taken as an exogenous factor by enterprises. The objective, therefore, is to determine what can be done by the enterprise to address the problem once an outage occurs.

² In these studies, the opportunity cost of unsupplied power is derived from the observation that firms hedge against power outages by investing in back-up generators. The marginal cost of unsupplied electricity is assumed to be the marginal cost of a kWh generated by a back-up generator. However, for industrial purposes backup generation may be imperfect substitute for utility supplied electricity. In other cases, the cost of production using self-generation may be such that it is too expensive for the plant to operate competitively using back-up generation for more than short periods of outages.

³ This method is based on the production-function approach. The consequences of outages are estimated through lost production (measured as gross value added for firms) or lost opportunity cost of time (for households).

⁴ The Input-Output approach evaluates the impact of power outages on the loss in value added in the whole economy by recognizing the interdependence of all sectors of the economy.

⁵ Stated Preference methods, including choice experiments and contingent evaluations, employ consumer surveys to obtain the set of consumer preferences required to estimate the willingness to pay (WTP) by households for more reliability.

⁶ In Nepal for long outages, the employees representing direct labor are released from work and are not paid, hence, represent variable costs saved. At the same time, the cost of both labor that is not released and paid plus any specialized labor that is involved in getting the plant back into working condition is added to the cost of the outage. The information used to calculate contribution come from the actual operating accounting systems of each of the firms.

⁷ It should be noted here that since Oxygen operates 24 h a day, 7 days a week, it suffers from more outages than Himal. At Himal, however, the production operations are performed only in two shifts of 8 h each, or for 16 h a day, and that too, for only 6 days in the week. The operating hours are from 6 AM to 10 PM, 6 AM to 2 PM for the first shift and from 2 PM to 10 PM for the second shift. Therefore, the frequency of the power failures for Himal, shown in Table 1, is adjusted by excluding those power outages occurred between 10 PM and 6 AM. Furthermore, the power failures in 88 non-working days in the year are also removed.