Market-driven coal prices and state-administered electricity prices in China

- We study the long-term relationship between coal and electricity prices.
- We model the short-term dynamics between coal and electricity prices.
- The long-term relationship between coal and electricity prices is very weak.
- Electricity prices were adjusted upwards more quickly.
- Adjustment to equilibrium is faster upwards for residential electricity prices.

This paper analyzes how the Chinese government adjusts electricity prices for both industrial and residential users in response to changes in coal prices using an asymmetric error correction model. Our results show that there is a long-term relation between the coal price and electricity prices but the relationship is weak especially for residential pricing. In the short run, we find electricity prices are adjusting faster upwards than downwards. Price adjustment towards long-run equilibrium is faster for residential users upwards than downwards. On the other hand, we find no evidence of asymmetric equilibrium adjustment in the electricity price for industrial use. The weak long-term relationship reflects the rigidity in electricity pricing and government's reluctance to subject end users to fluctuations of raw materials cost shifts.