Panel Paper: Reforming China’s Power Generation Dispatch Rule: Why Is Merging Provincial Dispatch Zones Inherently Challenging Yet Absolutely Necessary?

Friday, November 3, 2017
New Orleans (Hyatt Regency Chicago)

*Names in bold indicate Presenter

Zichao Yu1, Mun Sing Ho2 and Zhongmin Wang2, (1)Indiana University, (2)Resources for the Future


After a decade of stagnation in electricity deregulation, China is rejuvenating the efforts to reform its power sector. The overall goal is to improve economic efficiency and reduce pollution, which is to be achieved by a multi-pronged reform agenda that includes substituting administrative planning for market mechanisms, transforming state-owned power grid companies, liberalizing retail competition, and strengthening emission regulations over coal-fired power plants. Despite media speculations and scholarly debates, absent from the master plan is the determination to merge provincial dispatch operations and form regional dispatch zones. To many power market specialists and policy observers, this has come as an upset because an ISO/RTO setup will most likely yield more efficiency gains. Also, because of China’s mismatched geographical distribution of energy resources and electric load, establishing regional electricity markets has the potential to alleviate both the rising energy costs in eastern provinces and the severe under-utilization of renewable generation capacity in northern and western provinces. The decision not to institutionalize regional dispatch operations can have huge welfare impacts and therefore bears careful consideration.

Intrigued by the above policy imperative, this paper investigates the necessity and feasibility of merging China’s provincially fragmented dispatch operations into regional electricity markets. It is organized into three parts. First, given the lack of established knowledge in the existing literature, this paper describes, comprehensively, the historical, technical, economic and political contexts that give rise to China’s current generation dispatch practices. Rules and institutions that govern inter-provincial electricity flows are emphasized. Second, drawing on both theoretical and empirical studies that shed light on the design, operation and efficiency of regional electricity markets, this paper develops and proposes a conceptual framework for establishing regional electricity market institutions in China – its economic potentials and risks, political challenges and legal implications. Third, to verify the conceptual development with empirical findings, this paper analyzes three cases of the three ever regional wholesale electricity market pilots in China – two [1] of which were conducted between 2003 and 2006, and one [2] only recently in 2016. Descriptive documents, agency records and data from key stakeholder interviews are pulled together to construct these cases. Process tracing is employed for the analysis, and results reveal a few key lessons that are fundamental to institutionalizing functional regional electricity markets in China.

Essentially, reforming China’s electricity sector is not merely a change in economic institutions. Rather, there is a strong political dimension that roots the reform in China’s unique governance structure and government-business relations. A precondition for establishing regional electricity markets is that the Chinese central government should promulgate coordinated and consistent policies that clearly define the roles for central and provincial administrations and for state-owned enterprises. A necessary institutional arrangement is that an independent regulatory agency should be designated to implement the reforms and oversee regional wholesale market operations.


[1] These are the Northeastern and Eastern Regional Electricity Markets. Both started in 2003 and concluded in 2006.

[2] This is the "Jing-Jin-Ji" Regional Electricity Market, launched in 2016 and will stay active through 2020.

Full Paper: