Transition from plan to market: Imperfect regulations in the electricity sector of China

We present evidence on the distortions that arise from imperfect regulations compared with market allocation mechanisms. Using a triple difference strategy, we evaluate the effectiveness of the Energy-Saving Generation Dispatch reform in China, which aims to allocate more generating hours to power plants with higher energy efficiency. We find that the new dispatch rule improved resource allocation within provinces compared with the previous equal-share dispatch rule. However, despite these improvements, the reform fell short of its intended goals because of the failure to strictly implement the merit order based on real-time coal consumption rates. We demonstrate how the lack of compensation for losers, technical requirements for grid stability, the existence of multiple goals, and information costs contribute to imperfect regulation.