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Electricity blackouts impose substantial costs in developing countries. We advance a
new explanation for their prevalence in India: utilities’ wholesale electricity demand is
downward-sloping. We construct a novel dataset on India’s wholesale electricity sector.
Instrumenting for average variable cost with plausibly exogenous power plant equipment
outages, we estimate a wholesale demand elasticity of −0.49. Voltage monitoring
data confirm that equipment outages drive blackouts. Increases in procurement costs
therefore reduce the quantity of electricity delivered to end-use consumers. Our counterfactual
simulations suggest that lowering wholesale electricity costs could eliminate
blackouts for millions of Indian households.
