Lurching towards markets for power: China’s electricity policy 1985–2007

China’s electricity industry has experienced two major stages of development: from 1949 to 1984, the industry was treated as a subordinate sector whose goal was to support the development of other industrial sectors; since 1985, a series of reforms in its governance mechanisms have been carried out. This paper applies transaction-cost analysis to provide a new perspective on the efficiency of these reforms, emphasizing changes in the areas of electricity prices and investment incentives. We argue that the governance reforms successfully ended the significant social welfare losses resulting from the severe power shortages of the previous 30 years, introduced real or potential competition, and encouraged technological progress. However, they also led to low operational efficiency and excessive investment in power generation plants. Our empirical analysis, uses panel regression models, shows that by 2003 the reforms led electric capacity to increase tremendously. Meanwhile, the electricity price reform in 1996 promoted power generation corporations more responsive to electricity demand and price signals to some extend. However, it cannot be proved that the electricity price reform in 2003 (and the dismantle reform at the end of 2002) affect electricity generation corporations in the same way.