Econonomics of Energy and Environmental Policy

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Residential Welfare-Loss from Electricity Supply Interruptions in South Africa: Cost-Benefit Analysis of Distributed Energy Resource Subsidy Programs

Abstract:
This paper uses market data on income, electricity price, and electricity demand to estimate residential welfare loss caused by electricity supply interruptions in South Africa. The welfare-loss estimation (or "willingness-to-pay") uses cross-sectional data from 16,851 South African households. A two-part (probit and OLS) estimation method is used to model price and income elasticities, and a log-linear function models the marginal effect of electricity shortages. Household welfare loss is derived from an indirect utility function showing the difference in utility between shortage and non-shortage conditions. The welfare loss is compared to the costs and benefits of investing in distributed energy resources (DERs) to determine whether household solar PV units are a worthwhile investment for households suffering outages. The net benefit of investing in DERs is found under varying conditions of government subsidy to show whether household DERs is also a worthwhile societal investment. The study finds that (1) lower-income households are disproportionately affected by interruptions in electricity, as measured by WTP per dollar of income; (2) households may eliminate WTP by investing in DERs with a at least a 40% government subsidy; and (3) government policies to reduce welfare-loss caused by electricity interruptions should focus on the bottom-two income deciles in order to return the greatest reduction in WTP per dollar spent in subsidies. These findings imply that for every dollar policy-makers in South Africa spend on residential DERS subsidies, recipient households gain more than a dollar of economic benefit. Recipient households, in turn, would have greater resources and capacity for economic engagement, providing a twin benefit to both households and the South African economy.
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Keywords: Distributed energy resources, electricity, willingness-to-pay, household, South Africa

DOI: 10.5547/2160-5890.11.1.rtot


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Published in Volume 11, Number 1 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.


 

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