Efficiency distortion of the power generation sector under the dual regulation of price and quantity in China

Abstract

Abstract Separation of vertical integrated electricity sector and removal of entry barriers for power generation investment were advocated by China's electricity market reform in 2002. While market competitions were expected to intensify along with the increasing number of power generators and diversified ownerships, two major interventions, namely Benchmark On-grid Price regulations by the government and peak-frequency regulations by the dispatching organization manipulated the market competition frequently. This paper analyzes the mechanism of how dual regulation of price and quantity affects the efficiency of power plants, and then advocates an improved stochastic frontier analysis to examine the efficiency distortion of various utilities due to the price and quantity regulation by employing a newly developed firm-level data sets of power generation plants with capacity above 6000 kw over 2007 to 2012 in China, this paper shows that price regulation led to a deterioration of efficiency performance caused by the exaggeration with the actual on-grid price from the optimal equilibrium price. Additionally, centrally dispatched power plants suffered from negative impact of quantity regulation on the transient efficiency. Besides, the interactive effect of price and quantity regulation indicates that price regulation has greater negative impact on the centrally dispatched power plants than the non-centrally dispatched ones. There is also difference between the power plants of sub-industries. The thermal power plants are significantly influenced by the price and quantity regulation, while the renewable power plants are less likely to be influenced.