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Why we should think of power grids like fisheries


01 Dec 2016

Jacquelyn Pless Johanna Schiele

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Imagine you are building a manufacturing plant. You have the choice between waiting four months to connect to the electricity grid or bribing an employee of your local power supplier to set it up next week. It might be rational for you to bribe so you can begin operating, but what happens if several other plants in your region are doing the same?

Now let us suppose there is also a shortage of capacity and adding the demand that will accrue from these unauthorised connections will overburden the electrical grid, leading to a more vulnerable system and less reliable power supplies for everyone.

A recent study looked at whether bribes for electricity connections affect electricity reliability. The study uses World Bank data covering 72,617 firms surveyed from 2006 to 2012 across 118 developing countries. An instrumental variables regression approach is employed to estimate the impact of bribes on power outages. They find that firms with a propensity to bribe for electricity connections experience 14 more outages per month and incur 22% greater losses as a percentage of annual sales due to power outages.

It may be rational for individual firms to offer bribes when seeking to secure electricity connections, but the results show that in aggregate this overloads the grid. In other words, there is a tension between individual rationality and social efficiency, implying that electricity networks exhibit common-pool resource (CPR) characteristics.

However, it is not just the inability to exclude unauthorised consumption that makes these resources CPRs. There is a broader point here.

A CPR is a resource system that is rival and sufficiently large to make it costly (but not impossible) to exclude consumers from obtaining benefits from its use. Such goods are non-excludable in the sense that it is difficult to keep those who have not paid for the good from consuming it. They are are rival (or subtractable) in the sense that multiple individuals can use the system while each individual’s consumption subtracts from the total quantity available to others.

Electricity consumption, if we define it solely in terms of kWh of energy, is a pure private good. It is not available for consumption by others once it is consumed (i.e., it’s subtractable).

Viewing electricity as a single good, ‘electric power’, ignores the physical realities of electricity as it is transmitted, delivered, and consumed by end-users. Electricity is consumed as a bundle of goods—comprised of not just power but also voltage, frequency, and reliability. Since the functionality of each component relies upon the others, this bundle cannot be disaggregated. Consumers on the same network affect one another’s power, voltage, frequency, and reliability, making electricity consumption non-excludable.

In other words, even in systems with adequate resources, there is a need to control system stability in terms of voltage, frequency, and reliability, giving these systems CPR characteristics.

These CPR characteristics are going to become even more salient with increasing penetration of variable renewable electricity, if we expect ancillary services to form a bigger part of the system cost.

This perspective may be familiar to those who study natural shared resource systems, such as fisheries and forests, which are often classified as CPRs. But large socio-technical systems—like power grids—can also fit within this framework, experiencing increasingly frequent CPR-related problems such as congestion and overuse, access regulation that prevents excessive appropriation, and poor investment incentives.

Problems such as these emerge from a social dilemma in which rationality at the individual level leads to an outcome that is not optimal from the perspective of the group. Indeed, our findings parallel the tragedy of the commons story: electricity, which exhibits CPR characteristics, suffers from overexploitation as self-interested individual firms rationally bribe for electricity.

Beyond motivating the reconsideration of electricity grids as CPRs, the findings of this research also highlight the importance of the political economy for energy access. After all, energy access is not just about a physical connection to the grid—it’s about securing a reliable supply of energy when required.

More than 1.2 billion people around the world are without electricity and 1 billion more have access to only unreliable power networks. Ensuring the availability of reliable electricity is critical for economic growth and human development, however it is vastly complex and not strictly an issue related to investment in physical electrical infrastructure expansions and improvements. The problems are often symptoms of much deeper issues that transcend the boundaries of the electricity sector and are intimately tied to areas such as governance, corruption, fiscal policy, social equity, and political institutions.

 

This blog draws heavily from recently published work by Jacquelyn Pless, an Oxford Martin Fellow with the Oxford Martin Programme on Integrating Renewable Energy and the Institute for New Economic Thinking, and Harrison Fell, an Associate Professor of Economics at North Carolina State University. The authors of this blog gratefully acknowledge helpful comments from Nick Eyre, John Rhys, Sandra Tzvetkova, and Linus Mattauch.

Access the published paper, “Bribes, bureaucracies, and blackouts: Towards understanding how corruption at the firm level impacts electricity reliability”, here.