Electric Blues: Reforming China's Electricity Pricing System

By Jean-Marc Deschandol, Partner, and Tom Luckock, Associate, Norton Rose, Beijing

China's current power shortages have been well documented and are frequently in the news. The past year has seen China's generation capacity stretched to its limit, with large parts of China experiencing some degree of power shortage. In theory, in an efficient, deregulated market, electricity tariffs could freely increase, which would encourage users to decrease consumption and hence would balance supply and demand. In China, despite the increase in demand and soaring fuel prices, electricity tariffs have risen only marginally. In some cases tariffs have actually dropped. However, while China's system of state-controlled pricing may have insulated some consumers from electricity price rises, it has left grid companies starved of capital and many power plants unprofitable. At the same time, controlled pricing is at least partially responsible for the general misallocation of resources across the sector.