PAYING THE PRICE FOR UNRELIABLE POWER SUPPLIES: GENERATION OF ELECTRICITY BY PRIVATE FIRMS IN AFRICA The last column of table 4 shows the weighted average cost of consumed energy, taking into account the share of self-generated electricity reported in the enterprise surveys.<sup>29</sup> It can be seen that while the average total cost of own generation is very high, its effect on the weighted average cost of power for most countries is not very large, owing to limited use of own generation. The impact of own-generation costs is higher in countries where electricity from public utilities is subsidized (Egypt, Malawi, Morocco), where the supply of public power is reliable (Egypt, Mauritius, Morocco), and where the share of own generation is large (Benin, informal sector in Senegal).

# Benefits

Our analysis of the economic benefits of own generation takes two paths. The first follows the literature on the reliability of electricity supply (see, for example, Kariuki and Allan 1995) and computes the value of lost load, defined as the value an average consumer puts on an unsupplied kWh of energy. The value of lost load is represented by the customer damage function According to equation (5), the value of lost load ( _y_ ) measured in dollars per hour depends on variety of parameters ( _X_ ), including costs and frequency of outages, seasonal characteristics, and advance notice. Because data on seasonal characteristics and advance notice were not available, the lost load value was based on the costs and frequency of power outages. Lost load values were computed separately for firms with and without their own generators. For firms owning a generator the lost load value was calculated as where _v_ is the generator’s operational cost (in dollars per kWh), as described earlier, and _Kg_ is generator’s capacity in kW. For firms without a generator the lost load value was calculated as where _Z_ is reported sales lost from power outages and _t_ is reported frequency of power outages, multiplied by their average duration.<sup>30</sup> The economic benefit of owning a generator is thus expressed as the reduced loss per interrupted kW. The average values of lost load for firms with and without generators are reported in table 5. In all countries, except Uganda, the lost load is considerably higher for firms without a generator, especially in countries with infrequent (Mauritius, South Africa) or costly (Malawi) power outages.

The second way to determine the benefit of own generation is to estimate the marginal benefit of owning a generator by regressing the percentage of sales lost from power outages against the duration of power outages, generator ownership, and salient characteristics of countries and firms.<sup>31</sup> Selected

> 29 This indicator is based on the assumption that the electricity tariffs charged by the utilities are set according to marginal-cost pricing schedules.

> 30 Power outages were assumed to last eight hours on average.

> 31 An attempt to estimate the marginal benefit of owning a generator with respect to physical capital losses on a smaller sample of firms did not yield significant results. For details, see appendix 1, table 5.

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