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Pricing electricity blackouts among South African households

Nomsa Phindile Nkosi and Johane Dikgang
Lack of information about households’ welfare losses could lead to incorrect policy choices. Given the ever-increasing reliance on electricity, extreme weather conditions and current energy diversification strategies, it is vital that policymakers obtain information about households’ welfare losses due to power outages. According to Schmidthaler (2012), the costs associated with power outages may be direct, indirect or ongoing.

Since households are also highly affected by power outages, it is probable that households will be willingness to pay (WTP) to avoid or reduce outages. The primary objective of this study is to quantify household’s WTP to avoid power cuts. In this study, the contingency valuation method (CVM) is used to elicit outage costs. We subject respondents to eight outage scenarios. Furthermore, we contribute by extending basic analysis found in the literature by allowing for a proportion of the sample to have a zero WTP. A zero WTP is in many cases not unrealistic.
Face-to-face surveys were undertaken around Gauteng and the Eastern Cape provinces. The surveys were conducted using electronic equipment (gadgets/tablets) instead of the orthodox paper method. This new method has gained momentum lately because of its efficiency. It minimises human error, because the coding of the survey into the gadget occurs in advance, to make it easier and less time-consuming for the enumerator when collecting data.
The picture that emerges is that WTP increases with duration, which was expected. When making a comparison of planned and unplanned scenarios, the results that respondents prefer paying more for planned outages than for unplanned outages (i.e. in contrast with Carlsson and Martinsson, 2007). We argue that there are a number of relatively low cost measures that can be implemented to mitigate economic and social costs of electricity blackouts such as improved planning and communication with households. Therefore, the relatively higher WTP for planned compared to unplanned outages reflects household’s preference for a low cost measure as a mitigating strategy towards the costs of blackouts. This suggests that households prefer effective communication channels prior to planned outages.
It is not surprising that WTP for peak periods is significantly more than for off-peak periods (more than double), because peak period is the time when electricity is used the most. The same applies to summer and winter outages: more power is used in winter. The finding that WTP is more for winter relative to summer is consistent with those in other studies (see Reichl, Schmidthaler, and Schneider, 2013). The share of zero WTP is slightly higher for summer outages than it is for winter outages. There is not a very big difference in WTP for weekends and weekdays. Having power on weekends and on weekdays has similar importance, though weekdays do have preference.
Power outages is a social good, hence it is imperative that the government becomes aware of public opinions and preferences about possible solutions to power outages or preferred energy technologies. South African households are generally WTP for improved reliability of power supply. Overall, South African households place a significant value towards avoiding the interruption. This study gives a snapshot of household WTP to avoid power outages. The study generates insight into welfare loss due to power outages.
The value that society places on avoiding electricity blackouts is an important first step in energy planning and policy. Although the level of electricity security has improved over time, maintaining this degree of reliability in future is going to be difficult. Efficient electricity infrastructure investments decisions are possible only if the values associated with electricity blackouts is determined. The findings in the study could have much more implications than for the pricing, in particular for the investments in infrastructure and the quality assurance of the network.
The massive blackout has left millions of people without power. South Africa’s power crisis has widespread effects on both social and economic development. South African households would like more investment on electricity infrastructure, and their WTP to avoid blackouts implies that they would not want to leave the future of the electricity grid to chance. Some argue that Smart Grids could help reduce the cost of outages. The electricity infrastructure has to account for multiple objectives, including quality assurance of the network (i.e. reliability), affordability and security of power supply.

Emigration and education: the schooling of the left behind in Nigeria

The potential effects of migration on the welfare of the left behind consist in an important part of the debate around migration. In this paper we use data from the World Bank's migration and remittance household survey to examine the impact of family migration on educational attainment. Because migration status of households is endogenous, we use proportion of migrants in a local district and distance to foreign missionary station in 1921 as instruments for migration of household member.

Is Basel III counter-cyclical: The case of South Africa?

This paper develops a dynamic general equilibrium model with banking and a macro-prudential authority, and studies the extent to which the Basel III bank capital regulation promotes financial and macroeconomic stability in the context of South African economy. The decomposition analysis of the transition from Basel II to Basel III suggests that it is the counter-cyclical capital buffer that effectively mitigates the pro-cyclicality of its predecessor, while the impact of the conservative buffer is marginal.

South African attitudes about nuclear power: The case of the nuclear energy expansion process

Nomsa Phindile Nkosi and Johane Dikgang
Excessive use of fossil fuels is widely acknowledged as one of the main causes of climate change. The energy sector is one of the sectors that make use of fossil fuels. Greenhouse gasses are released during the combustion of fossil fuels, such as coal, oil, and natural gas, to produce electricity. Generating electricity from nuclear reduces pollution externalities hence it is argued by some to be part of a sustainable solution to achieving low-carbon energy options. This option According to Ertor-Akyazi et al. (2012) since energy security is a critical element in an economy, nuclear energy can play a role in ensuring smooth supply of electricity; it is reliable, and can provide electricity on a larger scale, similar to fossil fuels.

Nuclear power itself is an expensive investment (Liao et al., 2010). Households will be expected to contribute towards the capital required to invest in increasing and diversifying the power supply. Given this background, the objectives of our study are to investigate households’ attitudes and willingness to pay (WTP) for the proposed nuclear power plant. In this study, the contingency valuation method (CVM) is used to estimate WTP for nuclear power. Given the desire of the South African and other African governments to build power plants, and growing resistance against such plans, it is important to win public acceptance of the expansion and introduction of nuclear power, and of the cost burden.
Electricity is a marketable public good. In other words, it does not fit neatly into either extreme category of a public and a private good. It is subject to political considerations. The electrification programme in South Africa since new democratic era is a good example of government intervention aimed by providing cheap and affordable electricity to all. It is important for households to participate in the decision-making regarding the type of energy source the government will invest in, since households will be paying for it.
The recent nuclear accident in Japan has resulted in some countries (such as Germany) abandoning their nuclear plans altogether. Some new nuclear projects have been cancelled altogether, with plans to shut down present plants in the near future (International Energy Agency, 2015).
The South African government, like those of China, India and France, is in favour of further investment in nuclear power stations. It has announced that it plans to build two more nuclear power stations, in an effort to reduce reliance on coal and reduce carbon emissions. Nuclear power has a large load factor, compared to other power-generating sources. Even though building a nuclear power station is costly, the cost of the electricity generated from nuclear is low. But although nuclear is considered clean, there are concerns about its safety.
The study was undertaken in the Eastern Cape province, in and around the Thyspunt area proposed for a nuclear power station. A review of the literature suggests that WTP for protection against nuclear-related risks such as a nuclear accident decreases ceteris paribus with distance from the nuclear plant. To test the spatial dimension of responses to the external effects of nuclear power, a survey was also carried out in and around Johannesburg, in Gauteng province, which is 1 150km away from the proposed site. The aim here is to test if there are differences in WTP due to distance. Johannesburg is the country’s economic hub. The total sample was 695 respondents, of which 365 were in Johannesburg.
Our descriptive statistics from the raw data shows that a similar share of the people in Gauteng and the Eastern Cape support the proposed nuclear power plan. The two main reasons for supporting nuclear power are that it is deemed reliable, and that it can result in lower electricity prices eventually. In both provinces, the main reason cited for not supporting nuclear power was the risk inherent in the transportation and disposal of nuclear waste. The second reason for not supporting nuclear in Gauteng is the fact that constructing a nuclear power plant is costly. In the Eastern Cape, the second most important reason for condemning nuclear was that construction in Thyspunt would change the wave structure in Jeffrey’s Bay, which would have a detrimental impact on tourism.
A spike model is employed to analyse the determinants of not being WTP for nuclear power. The first decision is modelled with a binary probit model, where the dependent variable is equal to one if WTP is positive. The second decision, WTP given positive WTP, is modelled with a truncated regression model[1]. The proximity to the nuclear plant dummy is negative and significant in the probit model, which implies that those who are closer to the plant are more unlikely to state a zero WTP. The other variables that are negatively signed and significant are male dummy, availability of backup power, and children under 18 years.
The coefficient of distance to the nuclear plant in the truncated model is an insignificant determinant to WTP>0, which is in contradiction to the sample WTP descriptive. Males are more pessimistic about nuclear plants, which is reflected in their lower WTP compared to their female counterparts. The finding that having a higher electricity bill is likely to predict higher WTP may be due to the higher dependence on electricity of those households.
Gauteng households are prepared to pay R124.28 ($10.37) in support of the proposed nuclear plant, while households in and around the proposed site in the Eastern Cape are WTP significantly less (R70.47/$5.87). This is in line with the argument in the literature that WTP for coverage against the risks of a nuclear accident decreases with distance from the plant. We therefore conclude that for geographical reasons, households further away from the nuclear power plant are more supportive, as they are not directly exposed to the risk associated with nuclear plants.
A picture that emerges from the whole sample is that most respondents are in favour of the construction of the country’s second nuclear power plant. The modelling results suggest that putting more distance between residences and the nuclear plant would have little effect on WTP. This implies that distance effect does not matter as far as WTP for nuclear plant is concerned.


Latest Workshops

Skills Development

Monday, July 3, 2017 to Friday, July 7, 2017

Call for Application for Skills Development Training in Econometrics

The ERSA is pleased to invite applications for the Skill Development Training Programme in basic Econometrics for academics and postgraduate students (masters and PhD) with limited training in Econometrics and quantitative methods. The skills development initiative is in line with ERSA’s objective to deepen economic research capacity and to train young economists in Southern Africa.

7th Annual Meeting of the African Economic History Network: Innovation and the African Past

Wednesday, October 25, 2017 to Friday, October 27, 2017

The African Economic History Network, in association with the Laboratory for the Economics Africa's Past at Stellenbosch University, Harvard Univeristy's Center for African Studies and Economic Research Southern Africa announces a Call for Papers.

Lecture Series in Economic Theory: "Asymmetric Information in Markets and Organizations"

Monday, March 14, 2016 to Tuesday, March 15, 2016
In part 1 of this lecture, we are going to introduce the basic set-up of credence goods markets and discuss how markets should be designed to provide the right incentives for experts and their customers. The theoretical analysis will be complemented by the discussion of evidence of expert behaviour and market outcomes from empirical as well experimental studies. 
In part 2 of the lecture, the emphasis will be on information disclosure by interested parties and evidence provision by intermediaries.

The Third ERSA Political Economy Workshop

Tuesday, February 16, 2016 to Wednesday, February 17, 2016

Economic Research Southern Africa (ERSA) and the Institutions and Political Economy Group (IPEG) at the University of the Witwatersrand invite SA-based researchers with a focus on political economy, including public choice, to participate in the upcoming February 2016 workshop. Contributions, even in progress, on all political economy topics will be considered though preference will be given to: corruption, dictatorship, fiscal federalism, intergovernmental grants, political entrepreneurship, and regulation.