Willingness to Pay Among Swedish Households to Avoid Power Outages A Random Parameter Tobit Model Approach

ELFORSK iv Foreword The development of liberalized electricity markets around the world is, partly, an experiment of applied market theory with uncertain outcome. For this new paradigm to benefit customers thru efficient supply of electricity, we need increased and better knowledge on how competitive electricity markets really work and how to solve the problems that might occur. One crucial issue that has caught attention in later years is that customers' willingness to pay for security of supply should not only be addressed by the distribution companies in their investment and maintenance plans, but also incorporated in the economic regulation of the entities. This study was completed in 2004 and contributes to Sweden's internal process largely by setting a new target for network performance. It is our hope and belief that this study also can benefit other countries and markets in their striving to correctly integrate customers' valuations in the regulation of distribution monopolies. The study presented in this report was carried out by Fredrik Carlsson and Peter Martinsson at Handelshögskolan (School of Business) in Gothenburg with support from Elforsk's Market Design-program. This study covers the domestic customers. In the fall of 2005 the part of the study focused on business customers will be presented. Elforsk is owned by the Swedish electrical utilities. Its' business idea is to conduct research and development considered appropriate by its' owners and carry out this R&D jointly and together with other parties. Elforsk recently initiated the Market Design-program for the purpose of supporting research on the functioning of competitive electricity markets. The program is financed by Swedish utilities, EBL-Kompetanse in Norway as well as the Swedish Energy Agency. More information about the program, finished reports and conference documentation can be found at www.marketdesign.se. Abstract Using a contingent valuation survey, we elicit Swedish households' willingness to pay (WTP) to avoid power outages. In the study respondents are asked to state their WTP for avoiding nine different types of outages. We therefore apply a random parameter Tobit model since there is cross-sectional heterogeneity and a proportion of zero responses. Based on the estimations, we find that the WTP depends positively on the duration of the outages, and that WTP is significantly higher for unplanned outages. The overall variation in the WTP due to observed heterogeneity in housing and socioeconomic variables is small compared to the pure effects of power outages. Policy implications of those findings are discussed.