Economic burden of China's fairness regulations on power generation sector

Abstract

China's power sector is organized under a sequence of unique fairness regulations, which aim at guaranteeing egalitarian profit opportunities over power plants. However, the economic burden of those fairness regulations has not been comprehensively assessed and systematically analyzed due to the lack of a model that captures those fairness regulations' impacts on grid operations. Here, we develop a model of power-grid operations constrained by the fairness regulations and assess their economic burden. According to our estimation, in 2019, the fairness regulations raised China's annual fuel cost of power generation by 14.63% and caused an extra cost of around 120 billion yuan. We also found that the fairness regulations' impact on the tariff is limited but causes most power plants to have lower profits or higher deficits. The power plants lost profits mainly because that the regulations distorted their generation rather than influencing the tariffs. Our analyses further identify that the size of the burden is contingent on the capacity factor and the range of the difference between power plants' heat rates. Our results demonstrate that liberalizing the market competition will bring China significant economic dividends.