Progress in China’s electricity market reform and assessing its impact on generation efficiency

Abstract: Improving efficiency is often an important motivation to promote market reform. While China’s electricity sector, which has the world largest generation capacity and carbon emission, is transitioning from a planning mechanism to a market mechanism, the rigid ex post empirical analysis of its impact is still very limited. Using a unique dataset of coal-fired units from five southern provinces in China, we conducted a difference-in-difference analysis to estimate the impact of market reform on production efficiency of the coal generation. We find that market reform improves its overall production efficiency mainly through the inter-unit reallocation, e.g. reallocating production from high-cost units to low-cost units. The production from the low-cost units increased by 23.8-30.5% during the sample period. The intra-unit efficiency, measured by coal-intensity and self-utilization rates, was also improved. Applying the estimation results to construct a counterfactual market reform scenario, we simulate that the generation cost of coal-fired power could be saved by 2.44% and carbon emissions could be reduced by 2.37% during the study period. The decomposition results show that the inter-units reallocation contributes 46.10% to cost savings and 39.81% to emission reduction, respectively. The intra-fuel efficiency improvement contributes 44.69% to cost saving and 40.85% to emission reduction, respectively.