Power outages and the costs of unsupplied electricity: evidence from backup generation among firms in Africa

Electricity provision in Africa has been marred by low generation, poor supply and frequent power outages. One of the strategies adopted by firms to cope with this poor public supply is investment in backup generators. This strategy is not without cost. However, outage cost valuation studies have so far ignored the effects of firm’s characteristics on the extent to which a firm can suffer from power outages. Using cross-sectional data of 7353 firms currently operating in 12 African countries, we investigated the extent to which firms’ characteristics affect the costs of power outages and how that might create incentives to invest in backup generation. We used three different methods including marginal cost, incomplete backup and subjective evaluation. The results reveal that while the demand for backup is influenced by power outages, firm’s size, manager’s experience, other factors such as firm’s reputation and the use of the Internet for firm’s operations play more roles in decision to invest in backup. However, evidence is mixed regarding the effects of organisation’s characteristics on the (unmitigated) costs of power outages. This suggests that further data on the operating environment of different countries, or operating characteristics of the firms surveyed, will be needed to distinguish what is most important when it comes to cost of outages. The results also reveal that unmitigated costs still account for the larger proportion of the total outage costs despite high prevalence of backup ownership among the firms. The results also indicate that the previous studies on Africa have underestimated the costs of power outages due to the omission of additional costs that may result from incomplete investments in backup. Also, the results reveal that while marginal cost method underestimates outage cost, subjective evaluation has a potential to overstate it. Based on incomplete backup method, an average firm in Africa incurs outage cost ranging between $0.46 and $1.25 per kWh of unsupplied electricity. This cumulates to between $1,343 and $3,650 per KW. Furthermore, our analysis suggests that firms can still benefit significantly even when the current subsidised tariffs are replaced by cost-reflective rates that guarantee stable electricity supply. Using Nigeria as an example, the analysis reveals that the net outage cost (having adjusted for a cost-reflective tariff) incurred per kW by an average firm is enough to hire and pay the annual salaries of two additional workers at the current minimum wage in the country. This suggests that if electricity supplied to firms is improved just by 776 MW in the country, the amount that would be saved is equivalent to the cost of 1.6 million jobs.