Efficient market versus regulatory capture: a political economy assessment of power market reform in China

Jiang Dr. Lin and Chenxi Ms Xiang

Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series from Department of Agricultural & Resource Economics, UC Berkeley

Abstract: China began implementing market-based economic dispatch through power sector reform in 2015, but the reform has encountered some political and economic challenges. This paper identifies the reform’s efficiency changes and explores and quantifies the influences of market-driven and politically driven mechanisms behind these changes, employing a partial market equilibrium model integrating high-frequency data in southern China. We found that the dispatch transition improves the overall efficiency, but regulatory capture in provincial markets limits its full potential. The preference for local enterprises over central state-owned enterprises (SOEs) by local governments, in the form of allocated generation quotas, demonstrates the political challenge for market reform. The allocated generation quota protects small coal-fired and natural gas generators owned by local SOEs, lessening their motivation to improve generation efficiency, even after the reform. As a result, nearly half of the potential carbon dioxide emission reduction and social welfare gains through market reform is not realized.

Keywords: Social and Behavioral Sciences; Economic dispatch; electricity market; Regulatory capture; Efficiency gains; China (search for similar items in EconPapers)
Date: 2022-11-11
New Economics Papers: this item is included in nep-cna, nep-ene, nep-ind and nep-reg
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