Efficient market versus regulatory capture: a political economy assessment of power market reform in China

Abstract China began implementing market-based economic dispatch through power sector reform in 2015, but the reform has encountered some political and economic challenges. This paper identifies the reform’s efficiency changes and explores and quantifies the influences of market-driven and politically driven mechanisms behind these changes, employing a partial market equilibrium model integrating high-frequency data in southern China. We found the dispatch transition improves the overall efficiency, but regulatory capture in provincial markets limits its full potential. The preference for local enterprises over central state-owned enterprises (SOEs) by local governments, in the form of allocated generation quotas, demonstrates the political challenge for market reform. The allocated generation quota protects small coal-fired and natural gas generators owned by local SOEs, lessening their motivation to improve generation efficiency, even after the reform. As a result, nearly half the potential of carbon dioxide emission reduction and social welfare promotions through market reform is not realized.