Residential Welfare-Loss from Electricity Supply Interruptions in South Africa: Cost-Benefit Analysis of Distributed Energy Resource Subsidy Programs

This paper uses market data on income, electricity price, and electricity demand to estimate residential welfare loss caused by electricity supply interruptions in South Africa. The welfare-loss estimation (or “willingness-to-pay”) uses cross-sectional data from 16,851 South African households. A two-part (probit and OLS) estimation method is used to model price and income elasticities, and a log-linear function models the marginal effect of electricity shortages. Household welfare loss is derived from an indirect utility function showing the difference in utility between shortage and non-shortage conditions. The welfare loss is compared to the costs and benefits of investing in distributed energy resources (DERs) to determine whether household solar PV units are a worthwhile investment for households suffering outages. The net benefit of investing in DERs is found under varying conditions of government subsidy to show whether household DERs is also a worthwhile societal investment. The study finds that (1) lower-income households are disproportionately affected by interruptions in electricity, as measured by WTP per dollar of income; (2) households may eliminate WTP by investing in DERs with a at least a 40% government subsidy; and (3) government policies to reduce welfare-loss caused by electricity interruptions should focus on the bottom-two income deciles in order to return the greatest reduction in WTP per dollar spent in subsidies. These findings imply that for every dollar policy-makers in South Africa spend on residential DERS subsidies, recipient households gain more than a dollar of economic benefit. Recipient households, in turn, would have greater resources and capacity for economic engagement, providing a twin benefit to both households and the South African economy.