Restructuring without marketization? Utilization and profitability of China’s coal-fired power plants under “dual-track” wholesale competition

In this study, we examine China’s partially marketized wholesale power generation sector. A political economy approach is adopted to understand the “dual-track” system in which electricity production is coordinated through a combination of government planning and market transactions. By reviewing and synthesizing China’s policies and institutions that govern the dispatch of power generation, we develop a competitive bargaining model, under which power plants compete for production quotas by bargaining with government superiors using both market and nonmarket leverage. First, we hypothesize that power plants that are larger, cleaner, more fuel-efficient, and more politically powerful can bargain for more production quotas. Second, we hypothesize that long-term power purchase contracts can increase eligible power plants’ production and profitability. Then, we analyze data on the operational characteristics of China’s coal-fired power plants, and the empirical results largely verify the two hypotheses. Overall, this study demonstrates that even though China’s mixed wholesale generation market does not explicitly internalize fuel and environmental costs, it can promote energy conservation and pollution reduction when supported by the right policies. In addition, this “dual-track” approach is more politically viable than the fully marketized economic dispatch model because it more accurately aligns with China’s long-standing institutions of economic transition and governance.