LAUSR

Abstract Electricity regulators pay attention to electricity supply reliability in many countries, considering that power interruption can cause damage and destruction as modern societies increasingly rely on electricity. Since 2020, China's regulators have designed incentive schemes to encourage power grid firms to improve electricity supply reliability in some regions. An effective incentive scheme requires that regulators identify the cost of reliability improvement and match it to the incentive scheme. Using provincial panel data for 2012–2018, this paper employs the directional output distance function approach to estimate the shadow price of power interruptions in China's grid system—that is, the marginal cost of electricity supply reliability improvements. Results indicate that the shadow price of 1 min of interruption per customer ranged from 59.66 to 74.65 RMB in 2012–2018. This estimation also shows that the shadow price of 1 min of interruption varies substantially among provincial grid utilities. The marginal cost of improving electricity supply reliability in China's grid system is lower than in developed countries. Since the incentives far from cover the cost of improvement, the schemes implemented in some Chinese regions cannot provide incentives for quality improvements.