The Value of Lost Load in Swedish Industry

58 Pages Posted: 2 Nov 2021

See all articles by Thomas Broberg

Thomas Broberg

University of Umea - Centre for Environmental and Resource Economics

Runar Brännlund

University of Umea - Centre for Environmental and Resource Economics

Tommy Lundgren

Umea School of Business and Economics

Lars Persson

University of Umea - Centre for Environmental and Resource Economics

CERE Center for Environmental and Resource Economics

CERE

Date Written: October 28, 2021

Abstract

The power system is undergoing a drastic transition towards a system with high degree of intermittency at the same time as the transition in other sectors will require more electricity. Taken together this will make it more challenging to keep the instantaneous balance between demand and supply in the power market with increasing risks of interruptions and power outages as a result. The objective of this study is to estimate the cost of power outages in the Swedish industrial sector by using firm- level, production data. Our estimates of interruption costs are based on firms’ actual behavior concerning their use of electricity and the values created. The main approach is complemented with a qualitative study based on a questionnaire targeting key-persons in a small number of industrial production facilities. The purpose with this is to identify firm or facility specific aspects that that are not revealed by annual firm level data.

The main conclusion from this study is that the costs for the industry of supply interruptions are considerable, and seems to have increased over time, suggesting that the industrial sector has become more vulnerable to supply disturbances. In 2016 the estimated cost of a one-hour outage for an average industrial facility in Sweden was approximately 23 times larger than the value of the electricity not delivered (SEK 9502 versus SEK 400), whereas the cost in 2004 was approximately 13 times the market value of the electricity not delivered. However, there is substantial variation across firms and sectors. For an average facility in the electro and motor vehicle industry, for example, a one-hour cost is, according to our estimates, about 120 and 105 times the market value of the electricity not delivered, respectively (SEK 43680 versus SEK 415 for an average motor vehicle firm). In the pulp and paper industry, on the other hand, the outage cost is only about 5 times the value of undelivered electricity in spite of a relatively high outage cost in absolute value (SEK 27730). The reason for the relative low ratio for the pulp and paper industry is the very high level of electricity intensity.

The estimated costs should however be interpreted with care since they are based on the assumption that the interruption in production processes corresponds exactly to the duration of the outage, but also that the production losses during the outage are lost forever and cannot be compensated for in any way. Importantly, according to the results from our survey most firms or production facilities reported that the production interruption becomes noticeable longer than the power outage itself. In addition, most of them reported additional costs because of an outage, such as costs for overtime and delivery delays. On the other hand, several facilities firms reported that they may be able to “take back” the production losses during a year. Altogether, the first effects seem to dominate according to the survey results and the cost estimates reported should therefore be interpreted as lower bounds.

Keywords: Value of lost load, black-out, revealed preferences, Swedish industry, outage cost Avbrottskostnader, produktionsfunktionsansats, svensk industry

JEL Classification: Q40, Q41

Suggested Citation

Broberg, Thomas and Brännlund, Runar and Lundgren, Tommy and Persson, Lars and Center for Environmental and Resource Economics, CERE, The Value of Lost Load in Swedish Industry (October 28, 2021). Available at SSRN: https://ssrn.com/abstract=3951809 or http://dx.doi.org/10.2139/ssrn.3951809

Thomas Broberg

University of Umea - Centre for Environmental and Resource Economics ( email )

Umeå, S-901 87
Sweden

Runar Brännlund

University of Umea - Centre for Environmental and Resource Economics ( email )

Umeå, S-901 87
Sweden

Tommy Lundgren

Umea School of Business and Economics ( email )

Biblioteksgränd 6
Umea, 901 87
Sweden

Lars Persson

University of Umea - Centre for Environmental and Resource Economics ( email )

Umeå, S-901 87
Sweden

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