Sunday, March 30, 2014

Electricity shortages and productivity in India

Here is an interesting study about the impact of electricity shortages on firm productivity in India. As expected, productivity is hit negatively, but in much less intensity than revenue. This is due to the adjustments done at the firm level when there is advance knowledge of periodic outages. The main findings of the study are as follows:
  1. First, electricity shortages are a large drag on Indian manufacturing, on the order of five percent of revenue. 
  2. Second, however, electricity shortages affect productivity much less than revenue, and shortages alone certainly do not explain much of the productivity gap between firms in developing vs. developed countries. 
  3. Third, shortages have heterogeneous effects across plants with vs. without generators and with high vs. low electric intensity. Relatedly, because of economies of scale in self-generation, small plants are less likely to own generators, meaning that shortages have much stronger negative effects on small plants.

The authors conclude with the following recommendations:

Even if it is infeasible to sufficiently increase generation capacity or to raise electricity prices during periods of scarcity, our analysis suggests that two policy changes could reduce losses from shortages. First, our textile case study illustrates how advance knowledge of outages through planned power holidays can mitigate TFP losses by making additional inputs storable. Second, given that 54 percent of manufacturing plants use generators, this “distributed generation” provides production capacity that would optimally be exploited during times of scarcity. Currently, there are plants that have generators but don’t use them because they receive grid power, while other nearby plants without generators simultaneously experience outages. Mechanisms such as interruptible contracts allow plants that have lower costs of outages to reveal this to the distribution company. This allows shortages to be “targeted” at firms that can more easily accommodate them.

Here is another study on the quality of electricity supply and income growth. Chakravorty and Pelli (2013), show that 16% increase in households connected to the grid led to an increase in non-agricultural income of about 9%, and 32% increase in quality of electricity supply (decrease in the number of blackouts, or equivalently an increase in the average number of hours per day during which electricity is available) resulted in an increase in income by 28.6%.