Backup Power: Public Implications of Private Substitutes for Electric Grid Reliability

Private substitutes for electric grid reliability are common. We study their adoption and distributional implications. We first show that US households buy substitutes in response to a perceived decrease in grid reliability and that higher-income households are more likely to adopt them. We then develop a theoretical model of public provision of grid reliability in the presence of private substitutes that is consistent with these facts. The existence of substitutes increases aggregate welfare and reduces the efficient level of reliability spending. Using a calibrated version of the model, we find that, even though only a few households adopt batteries, most nonadopting households benefit from their availability. Battery adoption reduces utilities’ reliability spending, resulting in lower electricity bills for all customers. Most nonadopting households value these bill savings more than the reduced grid reliability.