In microeconomics, labor and capital are usually assumed as basic production factors. However, electricity is another important production factor in modern times. Even if labor and capital are plentiful, without electricity commodities cannot be produced because factories and various production facilities are operated using electricity. That is, electricity is an essential input to industrial production. In particular, the industrial sector may use more electricity as the industrial structure improves. For example, artificial intelligence, self-driving, and international data centers need a lot of power consumption. Thus, a stable power supply contributes to industrial production and further to economic development by increasing economic activities [1
This is the case for South Korea [2
]. As of 2017, 56.3% of the total power consumption was for industrial purposes. This percentage is the highest among OECD countries except Iceland. Steel, shipbuilding, semiconductor, automotive, and petrochemical industries, which mainly support the export-led South Korean economy, account for a significant portion of industrial electricity use. For example, a steel company consumes all of the electricity produced by a nuclear power plant with a capacity of 1 GW. If electricity is not supplied properly to these sectors, massive damage will shake the foundations of the national economy [6
Even if a power outage occurs for just one minute, it can cause significant damage to the manufacturing firms without uninterrupted power supply (UPS). For example, in the case of a food factory, if the mechanical equipment is stopped for a short period of time, all products on the production line must be disposed of. In addition, a power outage in a semiconductor plant that requires ultraprecision microprocessing compared to other manufacturing operations can cause tremendous damage regardless of whether an UPS is installed or not.
South Korea experienced a nationwide rolling blackout in September 2011, with a sudden increase in power demand due to high temperatures and a decrease in power supply due to power plant maintenance. During the blackout, the industrial sector suffered great damage. Therefore, there is a consensus among the people that such a blackout should not occur again [7
]. The Korea Electric Power Corporation (KEPCO), the only power distribution company in South Korea, and the South Korean government, which oversees KEPCO, are responsible for supplying electricity without any power outage. The government and KEPCO has made every effort to reliably supply electricity to the industrial sectors, making huge investments in power plants, transmission facilities, distribution facilities, and electricity storage systems. Not only the government and KEPCO but also the Korea Power Exchange (KPX) are responsible for reliably supplying electricity because KPX operates Korea power system.
The government is pushing for an energy transition policy to reduce the share of coal and nuclear power generation and increase the share of renewable energy generation from 2.2% in 2016 to 20.0% by 2030. Although public consensus has been formed on the promotion of the energy transition policy, there are also concerns about securing power supply stability due to the expansion of renewable energy. This is because electric power generation from renewable energy such as wind power and photovoltaic power has a nature of intermittency and uncertainty. Thus, a stable supply of electricity to the industrial sector will be the most important issue for the power authority, as renewable energy will be dramatically expanded in accordance with the government’s energy transition policy. In particular, this is needed to secure additional backup power sources, such as gas-fired plants and pumping-up power plants, expand the installation of electricity storage devices, and drastically strengthen the power system. These require a large amount of investment. To justify the investment, the benefits of the investment must outweigh its costs.
Determining the optimal level of power supply reliability requires a function of cost needed to improve power supply reliability and a function of damage costs reduced by improving power supply reliability. The optimal level of power supply reliability is determined at a level that minimizes the sum of the two cost functions. In particular, the function of damage costs reduced due to improved power supply reliability is the same as the function of economic value resulting from improved power supply reliability. Therefore, it is necessary to develop a function that represents the economic value of improving the reliability of power supply.
The costs of increasing power supply reliability can be measured without particular difficulties. However, estimating the benefits or economic value arising from the investment for improving power supply reliability is a very difficult task. This is because the outcome of the investment is improved supply reliability of electricity, and power supply reliability is not a commodity traded in the market. It is necessary to apply techniques to create a hypothetical market for trading power supply reliability so that the reliability of power supply can be assessed by the consumers. Moreover, power supply reliability has several attributes, each of which should be valued. There are various types and periods of power outages, such as when the outages occur, how long they last, when they happen during the week or on weekend, and in which season they take place. In other words, power supply reliability is a multi-attribute good [8
]. For example, power supply reliability has multiple attributes such as Information/Notice Provided, Continuous/Uninterrupted Supply, Frequency, Duration, Number, and Time of week.
There are two kinds of techniques to evaluate the power supply reliability. The first technique is to utilize actually revealed data. For example, one may directly investigate the economic damage incurred when a real power outage occurs and view this value as the economic value of improving the power supply reliability. Alternatively, a replacement cost approach that uses the cost information needed to install and operate an emergent backup generator that can reliably supply electricity in the event of a power outage could be applied. The second technique is to ask consumers directly or indirectly about the value of power supply reliability and analyze the responses using economic and econometric theories. In doing so, the application of specially designed economic method is required to value a multi-attribute good.
A typical way to do this is choice experiment (CE). CE is the most prevalent methodology for a multi-attribute good and has almost always been applied in some previous economic studies that have dealt with the valuation of improved power supply reliability [9
]. In this study, the CE is applied to valuing improved power supply reliability for manufacturing firms in South Korea. The four attributes of power supply reliability considered in this study are duration of power outage, the season of power outage, the time of day when power outage occurs, and the day of the week when power outage occurs. These were identified as factors of interest to the power authority as well as consumers in managing power supply reliability.
As will be explained in more detail below, this study randomly selected 1148 manufacturing firms from all over the country under the supervision of a professional survey company to gather data on value judgments about improved power supply reliability through a CE survey of them. The subsequent composition of this paper is as follows. Section 2
describes in detail the methodology and application procedures used in this study. Section 3
explains the economic and statistical models for analyzing data collected through the CE survey. Section 4
reports some implications after reporting the results. The final section is devoted to presenting conclusions.