Seminar: Out-of-merit costs and blackouts: Evidence from the Indian electricity market

Event Information

Date:
Friday 15 February — Friday 15 February, 2019
Location:
Indian Statistical Institute

Contact

Ishita Datta
Event type

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.

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Event | 6 May 2020