Event Information
Presented by: Dr. Louis Preonas, University of Chicago
Abstract:
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.