Electricity pricing in a partial reformed plan system: The case of China

Despite three decades of reform, the electric power industry in China is still organised by a partial reformed plan system, where the investment to build capacity has been liberalised, but the prices and the production remain controlled by the state. This paper examines the pricing behaviour of the power supply in China, where the state attempts to balance the interest between the public and the electric power industry. The empirical evidence shows that the cost factors are critical to the electricity pricing in China, and that the bargaining mechanism, which sets the plan price, allows the power producers to face a soft budget constraint on their own costs.

► This paper examines the pricing behaviour of the electric power supply in China.
► We model the price and profit function of 110 Chinese power firms.
► We find that the power firms face a soft budget constraint on their costs.