Estimating Economic Cost of Power Interruption for Manufacturing Firms inEthiopia: Using Stated Preference Approach

Abstract

In sub-Saharan African countries firms are suffering from frequent, long-lasting and random power outage, which makes it difficult to plan and undertake production activities. Thus, understanding the cost for firms due to unreliable power supply is important especially for policy makers and new investors who plan investment in the energy sector. Thus, the objective of this study is to estimate the economic cost of power interruption to manufacturing firms in Ethiopia specifically in the South Eastern industrial belt (area prone to frequent power interruption). The study covers small, medium and large-sized enterprises including different industry sectors. To this end, we conducted a choice experiment, collected data from 600 firms, and estimated a mixed logit model. The study finds that manufacturing firms located out of the capital city incur substantial economic cost due to power outage. An average firm’s total cost of outage is 51,777 ETB (US$976) per month, which corresponds to a ninefold increase from the firms’ average current monthly electricity bill. The cost of outages also amounts to 2.22 percent of the firm’s monthly sales. Our results indicate the existence of significant heterogeneity in terms of size and sector in which the firm operates. Policy implications based on the findings are; since the cost of a power outage is significant, firms are investing on own energy alternatives to cope up outage, and firms have willingness to pay to avoid outages, this shows there is a market for expensive and reliable power supply which suggests building more power plants as means to supply reliable electricity. One option is minimizing subsidies and introducing optimal tariffs that are cost recovering for new grid investment. This could also attract international and private investors to the sectors. The government should also introduce incentive regulations that encourage participation of private sector in the generation of electricity. Furthermore, the government should increase intensity of diversification of source of electricity in order to liberate industries from rainfed dependence. Finally, the government should make blackout schedule reliable (try to make it during night time since majority of firms are shutdown at night) as it may help firms to shift their productions from machinery dependent to manual methods and makes the necessary substitutions such as from make to buy of intermediate inputs due to a shortage of electricity in order to reduce economic cost of power outage.