Blackouts: The Role of India's Wholesale Electricity Market

Abstract

Blackouts impose substantial costs on electricity consumers in developing countries. We advance a new explanation for their continued prevalence in India, the world’s third-largest power sector: unlike in the developed world, utilities’ wholesale electricity demand is downward-sloping. We construct a novel dataset on power plant operations and demand. Instrumenting for cost with plausibly exogenous power plant equipment outages, we estimate a wholesale demand elasticity of –0.43. As a result, any increase in procurement costs will reduce the amount of electricity retail customers receive. Wholesale market simulations suggest that lowering procurement costs could eliminate blackouts for millions of Indian households.