Localizing Markets: Political Economy of Electricity Market Reform in China

• In Event: Bureaucrats and Business in Communist and Post-Communist Countries

Abstract

Under Xi Jinping, market-based reforms replacing portions of government planning and price-setting have accelerated in a handful of sectors. The electricity sector has seen some of the largest changes, with over a quarter of electricity in the country now sold through provincial markets, up from a few percent in 2014. The pace and implementation of these markets varies by province in some counter-intuitive ways, with traditional early market-adopting provinces such as Shanghai at low levels and historically late adopting provinces like Inner Mongolia at high levels. In this paper, we generate hypotheses of how provincial governments' implementation of markets may depend on rent distribution goals for producer and consumer surplus, which we operationalize using the composition of firm ownership. We focus on the outcomes of market design, the timing of their introduction, and efficiency of implementation as measured by cost pass-through. We test these hypotheses using a novel dataset at the provincial level comprised of monthly electricity market prices together with coal prices and composition of provincial ownership in energy production and consumption industries. Implications for the future of market reforms across key sectors emphasized by the central government are discussed.

Authors

• Michael R Davidson, University of California, San Diego

• Valerie Jean Karplus, MIT Sloan School of Management