On Balance: Averting Expenditures and Willingness to Pay for Electricity Supply Reliability

The objective of the electricity transmission project is to increase domestic electricity consumption by improving the availability and reliability of electricity in Nepal’s electricity grid. This investment is to be financed through a grant from the US government via the Compact between the Millennium Challenge Corporation (MCC) and the Government of Nepal at a proposed cost of US$ 530 million. In addition, the Nepal Electricity Authority (NEA) is in the process of undertaking a number of generation projects with a total cost of approximately US$ 350 million, facilitated by funding of US$ 150 million from the Asian Development Bank and several bilateral development assistance organizations. Hence, the total investment program for system improvement is approximately US$ 880 million.

 

Specifically, the project is expand and strengthen the high voltage electricity transmission network to support new investments in generation. The project includes the construction of approximately 300 kilometers of high voltage power lines, equivalent to one-third the length of Nepal, including a link to the Indian border to facilitate electricity trade; construction of three substations to help transform power from one voltage level to another for further transmission or distribution to customers; and activities to improve sector governance to promote private investment. In addition to this infrastructure, the project is also include a benefit sharing program to increase access, reliability, and productive use of electricity within project-affected municipalities.

We discuss two recently published benefit-cost analyses of willingness to pay for electricity supply reliability (Niroomand and Jenkins 2020a, 2021b). The actual field survey on household and business sectors was conducted by MCC to assess the potential economic benefit of the incremental value of utilizing additional energy at a lower cost per unit of service in place of alternative energy sources. In case of household the respondents, the average perceived number of unplanned outages per day was 2.85 and perceived longest duration of outages averaged between 2 – 3 hours. The frequency of the outages was mainly during the evening and night time as reported by 57.4% of the respondents. In case of businesses the respondents the average perceived number of unplanned outages per day was 2.86. The longest interruption during the past twelve months lasted 3 hours, and 47.3% of the outages happened in the afternoon.

The burden of the averting expenditures falls more heavily on the poorer households living in the rural areas and the smaller commercial and non-commercial businesses. While AEs are large, and always multiples larger on a kWh basis than the cost of power if it could be purchased from the electric utility, these mitigating expenditures still do not guarantee a reliable electricity service. Furthermore, averting expenditures, in terms of the quality of electricity service tends, to be an imperfect substitute for reliable high quality service provided by a grid connection. The evidence from the stated preference part of this research supports this statement. From the stated preference analysis, it was found that the range of estimates of the WTP for electricity reliability by households was between 64 and 83 percent increase of the current electricity bill. For industry, the stated preference estimate of the WTP was between 71 and 94% of the current electricity bill. In contrast, our analysis show that the monthly averting expenditure (AE) for households amounts to 53 percent of their total payments to the electric utility. For service and industry, AE as a percentage of their electricity bill is 36 percent and 40 percent, respectively, with a weighted average over all the electricity consumed of 43.7 percent of the entire value of the revenues received by the utility for the electricity service.  

From our analysis both households and businesses are willing to pay (WTP) more to get from a 50% reduction in outages to a complete elimination of outages than they are WTP to get from their current situation to a 50% reduction in the incidence of electricity outages. The stated preference analysis findings indicate that the range of estimates of the WTP for electricity reliability by households was between 64 and 83 percent increase of the current electricity bill. For industry, the stated preference estimate of the WTP was between 71 and 94 percent of the current electricity bill. In contrast, the WTP estimate for households based on AE was a 53 percent increase and the estimate of the WTP of industries from averting expenditure is 40 percent.

Thus, on the benefit side of the cost-benefit analysis, the marginal benefits are likely to be increasing over the range of improvements until full reliability is achieved. Using the average values for the AE potential to be saved, the annual estimates of the range of the monetary values of the gross benefits from improving the quality of the electricity service for both households and businesses in Nepal are reported in US$ in Table 1.

Table 1. Estimate of the annual AE for reduction in outages by consumer class
 
  AE percentage weighted by electricity bills of customer
Total annual  
    Domestic consumers 98,936,355
    Non-commercial and commercial 25,895,931
    Industry 62,775,483
   
    Total annual expenditure of all the sectors 187,607,769
   
[email protected]%, 20 years  
    Domestic consumers 842,300,962
    Non-commercial and commercial 220,466,658
    Industry 534,443,075
   
    PV of the benefit of all the sectors 1,597,210,695
 

A comparison of the present value of the reduction in coping costs of US$ 1,597 million with the estimated investment costs of US$ 880 million needed to rectify the situation indicates that the benefits are more than 80% greater than the costs. The magnitude of the AEs indicates that investments in the electricity system to improve the quality of the service would be a much less costly option than individual households and businesses engaging in averting expenditures. These findings have important implications for an investment strategy improving the reliability of electricity service in Nepal. At the upper range of the values of WTP the estimated NPVs are a very large amounting to some three times the costs of the needed investments.

Ultimately, we conclude that from the estimates obtained for the current level of AE it would appear that investments being made by the government and donors, such as the USA through the MCC, and the Asian Development bank are justified on the basis of this illustrative economic cost-benefit analysis. This suggests that projects that offer a comprehensive solution to the problem of electricity reliability might have a greater economic return than those that represent only partial solutions. 

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