Impact analysis of coal-electricity pricing linkage scheme in China based on stochastic frontier cost function

• This study evaluates the coal-electricity pricing linkage policy in China.
• Six stochastic frontier cost models are used to estimate efficiency measures.
• The coal-electricity pricing linkage scheme is a double-edged sword.
• We suggest the threshold value of 5% or group specific.

This study evaluates the feasibility and fairness of 2012 amendment to coal-electricity pricing linkage policy in China. Our empirical design is based on several stochastic frontier cost functions and the results show that the amended pricing linkage scheme is a double-edged sword as follows. On the one hand, it provides incentives for less-efficient (with efficiency less than 90%) power plants to increase their efficiency. One the other hand, it imposes a penalty to highly-efficient power plants (with efficiency more than 90%). And even worse, the higher the efficiency is, the bigger the penalty will be. To make the current coal-electricity pricing linkage scheme more feasible, we suggest the threshold value of 5 instead of 10%, and a group specific threshold value instead of the current one-size-for-all practice.