Impacts of market segmentation on the over-capacity of the thermal electricity generation industry in China

Abstract

China's thermal electricity generation industry, the world's largest emitter of carbon dioxide, is experiencing a severe over-capacity problem. An effective solution to this problem is urgently needed to achieve the energy conservation and emission reduction goals, as well as a sustainable growth of China's economy. However, under China's existing political promotion system, there exists a market segmentation that hinders cooperation between regions. In the short term, market segmentation is conducive to the utilization of installed capacity in each place; however, in the long run, can market segmentation alleviate the over-capacity problem in the thermal electricity generation industry across China? Using the China Industrial Enterprise Database (CIED) from 2002 to 2013, this paper estimates the capacity utilization rate, an indicator of over-capacity, of China's thermal electricity generation firms through stochastic frontier analysis. Then, by applying the fuel and electricity price index, this paper measures the degree of market segmentation at three levels, (i) among all provinces, (ii) between neighboring provinces and (iii) among provinces covered by the same grid company. Based on these, this paper empirically estimates the impacts of market segmentation on the utilization rate of China's thermal electricity generation firms. The results indicate that market segmentation has significantly negative impacts on the capacity utilization rates. Heterogeneity analysis suggests that private firms, firms in regions with abundant coal resources and those in the western regions are affected to a larger degree. The results remain robust in the robustness check that replaces the data with the China Stock Market & Accounting Research (CSMAR) Database, the counterfactual test and the test that concerns endogeneity. These findings provide important policy implications for the solution of the over-capacity problem in China's electricity generation industry.