Convergence of Operational Efficiency in China's Provincial Power Sectors.

• Author: Jaunty, Vishal Chandr

1. INTRODUCTION

   China's electricity generation market experienced unprecedented expansion in the past decade as the country worked to ensure sufficient and secure levels of electricity supply for sustained and high-speed economic growth. From 1996 to 2008, the annual average growth rate of power capacity was approximately 12.5%, boosted by the acceleration of industrialization and urbanization. China now owns 960 GW of installed generation capacity, second only to the United States' 1075 GW. Yet, electricity generation mainly occurs in coal-fired power plants. For the improvement of efficiency and reduction of emissions, the power sector faces a series of market reforms from the 1980s initiated by the government. Even though some reforms have taken place in the power sector, relative monopoly is still surviving and hampering the development of the liberalized economy (Wang and Chen 2012), indicating lower effectiveness of the reforms in improving the efficiency and productivity from the perspective of market structure.

   The government also provides a number of technological initiatives to promote energy efficiency and pollution abatement. These measures mainly focus on the closure of older, less efficient plants and the construction of new plants with advanced technologies, for instance supercritical and ultra-supercritical coal plants. As summarized in Zhou et al. (2010), massive attention is devoted to energy efficiency measures with focus on the so-called "top ten priorities" and "Ten key Projects". The largest energy-consuming power plants signed agreements to improve their energy performance through the "Top 1000 Program" (IEA 2010c). Several targets have also been announced officially for the increase of generation capacity and the promotion of renewable energy. (1) However, the rapidly expanding generating capacity in China cannot meet the even faster growth of electricity demand. (2) Lack of unified national grid system and limited access to the most advanced technologies cause the generating and transmission systems to remain underdeveloped and inefficient in spite of substantial investment. An even more challenging target has been set in the 12th Five-Year-Plan, which clearly mentions the reduction of energy consumption per Yuan 10,000 of GDP by 32% compared to the 2005 level. China also promises to reduce its C[O.sub.2] emission intensity by 40-45% in 2020 compared to 2005 in the United Nations Framework Convention to Climate Change (UNFCCC).

   China's electricity sector is particularly important for achieving these targets, as it accounts for nearly half of greenhouse gas emissions (Steenhof and Fulton, 2007). Around 80% of electricity generation in China comes from coal-fired power plants (NBS, 2013). The energy intensity and C[O.sub.2] emissions in China is highly dependent on coal consumption. Any inefficient use of coal in electricity generation results in higher coal consumption, which keeps the energy intensity and C[O.sub.2] emissions at a higher level. Despite the importance of the electricity industry in China, very few studies have investigated the trend in the efficiency of electricity generation at the provincial level. For this purpose, we have to understand the status-quo of the electricity efficiency across Chinese provinces.

   In this paper, we first estimate the operational efficiency using DEA method. In the second stage, several convergence models are employed to investigate the change of operational efficiency over time and across provinces. (3) We examine the dynamic changes in operational efficiency from two perspectives: the change in technical efficiency and the change in productivity. There are reasons to study operational efficiency and its change. The level of operational efficiency provides us with information on individual provincial power sectors' performance. As this study distinguishes inefficient and efficient provinces in terms of operational variables, we can identify suitable models for less efficient provinces to emulate. Policies and regulations used in efficient provinces may also be suitable role models for inefficient provinces in order to improve their performance. Moreover, operational efficiency tells us how much more electricity can be produced to fulfill our demand. This is particularly important for the government in terms of energy supply security.

   Nevertheless, changes in efficiency can only reflect the development of performance of individual provinces and cannot account for the degree of effectiveness of the energy policies across provinces. With convergence analysis we can explore the cross-province disparities (4) in electricity generation performance and relate it with the effectiveness of the provincial energy policies. If the electricity efficiency gap among provinces diminishes over time, then the Chinese government may be less concerned about the effectiveness of their regional energy policies especially with regards to the power sector. If, on the other hand, the gap tends to persist over time, then the Chinese government should "introspect" on areas it is lagging behind and enact policies to enhance the efficiency of provincial power sectors. Our results reveal a converging pattern across Chinese provinces. Specifically these provinces are found to converge faster to their own operational efficiency long-run growth paths than to a common one. We also find evidence that reform of pricing system, unity of the grid distribution network, urbanization and economic structural change, avoidance of government intervention, are necessary to increase efficiency. This paper is organized as follows. Section 2 reviews the convergence literature with special reference to the power sector. Section 3 describes the methodologies. Section 4 summarizes the data. Section 5 presents efficiency models and results. Section 6 shows various convergence models and our main findings. Section 7 provides some policy implementations and concludes the paper.

2. REVIEW OF LITERATURE

   The concept of convergence is borrowed from the neoclassical growth literature (Solow, 1956). It essentially prophesies a catching-up of the poor countries with the rich ones in terms of income. Income convergence is achieved if differences in relative income are falling over time. Recently, the convergence concept has also been applied to the field of energy. So far, the literature has focused on carbon dioxide (C[O.sub.2]) emissions. Nguyen Van (2005) makes use of principally non-parametric distribution dynamics techniques to study C[O.sub.2] emissions for 100 countries over the period 1966-1996. His results reveal a tendency for C[O.sub.2] emissions in industrialized countries to converge even as he discerns little evidence of convergence for the whole sample. Romero-Avila (2008) uncovers both stochastic and deterministic convergence of C[O.sub.2] emissions, occurring in 23 developed countries over the period 1960-2002. Westerlund and Basher (2008) find indication of stochastic convergence for a group of 28 developed and developing countries over the period 1870-2002. Jobert et al. (2010) report further evidence of absolute convergence in C[O.sub.2] emissions for 22 European countries over the period 1971-2006. Marrero (2010) finds evidence of conditional convergence of greenhouse gases (GHG) emissions for 27 European countries over the period 1990-2006.

   From the electricity perspective, the convergence phenomenon has also been investigated. Robinson (2007) tests for [beta]-convergence hypothesis by using annual electricity price data for 9 European Union members over the period 1978-2003. The hypothesis holds for most of the countries in his sample. Using several parametric and non-parametric concepts, Jaunky (2008) uncovers evidence of electric power consumption divergence for 22 African countries for the period 1971-2002. Using non-parametric techniques, Maza and Villaverde (2008) test the residential per capita electricity consumption convergence for 98 countries over the period 1980-2007 and report weak evidence of such convergence. Zachman (2008) investigates whether a common European market for electricity for 11 European countries over the period 2002-2006 is emerging. He finds evidence of stochastic convergence for some countries only.

   Liddle (2009) detects both [sigma]-convergence and [gamma]-convergence in electricity intensity of 22 IEA/OECD countries. He also supplies evidence of commercial electricity intensity convergence toward a bell-shape distribution while industry electricity intensity is converging toward two groups such as one with relatively high electricity intensity and another with relatively low electricity intensity. Jaunky (2010) provides evidence of a divergence pattern for electric power consumption among the Southern African Power Pool (SAPP) members over the period 1995-2005. Jaunky (2013) finds some mixed evidence of neoclassical convergence of TE for the SAPP members over the period April 2003-March 2010. His study especially reveals the occurrence of club-formation and [gamma]-divergence.

   Recently, Jiang and Wu (2008) analyze the electricity productivity convergence of 30 Chinese provinces over the period 2000-2006. They define electricity productivity as output divided by final electricity use. They use the panel data model to test the conditional convergence and introduce province-specific factors such as electricity price, investment ratio, FDI, technologies, and international trade. Their panel data estimation results show that the gap between the eastern China and western China is decreasing, but there is no absolute convergence in electricity-productivity levels. Furthermore, the influence of electricity price, investment, FDI, technologies and openness on province-specific electricity-productivity growth rates are found to be limited, though the industrial structure negatively influences the electricity productivity growth. We...