Blackouts: The role of India's wholesale electricity market

Abstract

Electricity blackouts impose substantial costs on developing countries. We advance a new explanation for their continued prevalence in India, the world’s third-largest power sector. Constructing a novel dataset spanning the sector, we demonstrate that wholesale power demand is downward-sloping: demand falls when wholesale procurement costs rise. Supply-side misallocation increases costs, thereby decreasing the quantity of electricity supplied to retail customers. We highlight a key source of misallocation: discretionary power plant outages resulting from weak incentives rather than technical issues. Eliminating these outages significantly lowers procurement costs, increasing the quantity supplied by enough to eliminate blackouts for 23 million Indian households.