According to the U.S. Energy Information Administration, retail expenditures on electricity were approximately $325 billion in 2006, the most recent year for which data are available, which represents approximately 2.5 percent of that year’s GDP. These values, while consequential, significantly understate the economic contribution of this industry since they do not reflect the consumer surplus that buyers receive from their purchases of electricity. This point is illustrated in Figure 2.1, which depicts a hypothetical demand curve for electricity. At price P₁, consumption of electricity equals Q₁. Given this price and quantity, expenditures on electricity can be represented by area A while consumer surplus, the difference between what consumers are willing to pay for electricity in excess of what they actually pay, is represented by area B.¹ Area B represents the net economic benefits to consumer from electricity and thus also represents the economic impact of a supply interruption on consumer net economic welfare.

Because electricity is critical to maintaining modern lifestyles, the consumer surplus from electricity is generally believed to be very large relative to expenditures. As a result, interruptions in electricity supply are believed to be very costly in terms of lost consumer surplus. For example, a recent study by de Nooij, Koopmans, and Bijvoet estimated that for households in the Netherlands, the value of lost load, i.e., the estimated loss in consumer surplus from an electricity market shortage, was €16.4/kWh (equivalent to US$24.47 per kWh as of August 11, 2008).² This is about 95 times the 2006 average retail price paid by households in the Netherlands.³ Consistent with this estimate, the lowest estimate of the economic costs to the United States of the August 2003 blackout in North America is $4 billion.⁴ To put this estimate in perspective, wholesale generation revenues in New York

FIGURE 2.1 A hypothetical demand function for electricity, expenditures on electricity, and the consumer surplus from electricity.