Scandinavian Working Papers in Economics

Working Papers in Economics,
University of Gothenburg, Department of Economics

No 731: Cost of Power Outages for Manufacturing Firms in Ethiopia: A Stated Preference Study

Fredrik Carlsson (), Eyoual Demeke (), Peter Martinsson () and Tewodros Tesemma ()
Additional contact information
Fredrik Carlsson: Department of Economics, School of Business, Economics and Law, Göteborg University, Postal: P.O. Box 640, SE 40530 GÖTEBORG, Sweden
Eyoual Demeke: Department of Economics, School of Business, Economics and Law, Göteborg University, Postal: P.O. Box 640, SE 40530 GÖTEBORG, Sweden
Peter Martinsson: Department of Economics, School of Business, Economics and Law, Göteborg University, Postal: P.O. Box 640, SE 40530 GÖTEBORG, Sweden
Tewodros Tesemma: Department of Economics, School of Business, Economics and Law, Göteborg University, Postal: P.O. Box 640, SE 40530 GÖTEBORG, Sweden

Abstract: Having a reliable supply of electricity is essential for the operation of any firm. In most developing countries, however, electricity supply is highly unreliable. In this study, we estimate the cost of power outages for micro, small, and medium-sized enterprises in Addis Ababa, Ethiopia, using a stated preference survey. We find that the willingness to pay, and thus the cost of power outages, is substantial. The estimated willingness to pay for a reduction of one power outage corresponds to a tariff increase of 16 percent. The willingness to pay for reducing the average length of a power outage by one hour corresponds to a 33 percent increase. The compensating variation for a zero-outage situation corresponds to about three times the current electricity cost. There is, however, considerable heterogeneity in costs across sectors, firm sizes, and levels of electricity consumption. Policy makers could consider this observed heterogeneity when it comes to aspects such as where to invest to improve reliability and different types of electricity contracts.

Keywords: power outages; willingness to pay; choice experiment; Ethiopia

JEL-codes: D22; Q41

26 pages, May 2018

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