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How do Price Caps in China’s Electricity Sector Impact the Economics of Coal, Power and Wind? Potential Gains from Reforms

Bertrand Rioux, Philipp Galkin, Frederic Murphy, and Axel Pierru

Year: 2017
Volume: Volume 38
Number: KAPSARC Special Issue
DOI: 10.5547/01956574.38.SI1.brio
View Abstract

China imposes maximum prices by plant type and region on the electricity that generators sell to utilities. We show that these price caps create a need for subsidies and cross-subsidies, and affect the economics of wind power. We model the price caps using a mixed complementarity formulation, calibrated to 2012 data. We find that the caps impose an annual cost of 45 billion RMB, alter the generation and fuel mixes, require subsidies for the market to clear, and do not incentivize adding capacity for a reserve margin. They incentivize market concentration so that generators can cross-subsidize power plants. Depending on the regulatory response, increasing wind capacity can alleviate the distortions due to the price caps. The added wind capacity, however, does not have a significant impact on the amount of coal consumed. We also find that the feed-in tariff was priced slightly higher than necessary.

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