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Wednesday, October 3, 2018 at 11:40am to 1:10pm
Uris Hall, 498
Thomas Eisenberg - Cornell University
Allocated Production, Misallocation, and Investment in China's Coal Power Industry
Abstract: For roughly two decades, the Chinese government has announced plans to restructure their electricity generation market and introduce market-based mechanisms. This transition has gone in fits and starts, and has left China balancing two countervailing concerns in this market: allocating production on the electric grid according to a strict and complex regulatory structure, and attracting private investment into this market. This paper uses both a novel approach to identifying misallocation in the presence of capacity constraints, as well as a dynamic investment model that incorporates the distortions caused by this misallocation, to measure the aggregate cost and capacity losses from this policy regime. I find only modest aggregate cost-efficiency and capacity gains both in a static and dynamic setting for this market. Counterfactual results suggest the current policy regime is designed to promote widespread capacity growth, possibly in an attempt to avoid market concentration, at the expense of efficiency. These results are extremely heterogeneous by province and year, likely due to the decentralized nature of this sector. While reallocation using existing capacity and transmission infrastructure would be a net positive from a cost savings standpoint, other regulatory strategies, such as investments in transmission infrastructure and pricing mechanism reforms, would likely need to be pursued in parallel for China to meet its aggregate electricity demand at a significantly lower cost.