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Resolving China's Power Shortage

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Andrea Bakeberg

on 4 March 2014

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Transcript of Resolving China's Power Shortage

Price elasticity = -0.65
1% P = 0.65% QD

Residential users have more elastic demand than industrial users. Therefore, they are likely to make greater efforts to reduce their electricity usage when prices rise.
The price elasticity of the Indian demand for electricity has been estimated to be
-0.65 among residential users
and -0.45 among industrial users.

If these elasticities apply to China as well, how will the impact of a price increase be spread between residential as compared with industrial users?
State Electricity Regulatory Commission (SERC)
Regulates all aspects of electricity industry except pricing.

State Power Corporation of China
Has monopoly power by controlling 83% of the transmission grids and 50% of the generating capacity.
Electricity Industry in China
Resolving China's Power Shortage
Price elasticity = -0.45
1% P = 0.45% QD

Industrial users are less likely to change their electricity usage than residential users.
Industrial users would bear more of the burden of a price increase due to their lower price elasticity (their total expenditure would increase more than that of residential users).
When organizations refuse to pay loans or their power bills, this will cause the price elasticity of demand for electricity to be less elastic.

This is because organizations that do not pay off their debts or bills will not be concerned with how much electricity costs.
When contract prices are set for thermal coal, then the variable costs for the electric power plants will decrease. This is because thermal coal is an input in producing electricity. Since marginal cost is (TC-FC)/Q, the marginal cost will decrease with contract pricing because decreased input costs will result in lower TC.
How does the contract price of thermal coal affect an electric power plant's production?
If the contract price for thermal coal increases to 99% of the market price, then the marginal cost of electricity production would increase.
This would shift the power plant's supply curve to the left.
Using marginal cost pricing, the government would need to increase the price to equal the new marginal cost and avoid a power shortage.
Marginal cost pricing: the policy in which the price is set equal to the marginal cost and the provider must supply the quantity demanded
(Png 416).
Many Chinese organizations ignore the market system. For instance, they borrow money from banks and refuse to repay, thus creating "bad debts" for lenders. Likewise, they might consume electricity without bothering to pay the power supplier.

Do such organizations cause the demand for electricity to be more or less price elastic?
Suppose that the Chinese government regulates the electricity industry through marginal cost pricing.
If the contract price were raised to 99% of the spot market price, how would that affect the electric power plant's production?
"Bad Debts"/Consumption without Payment & Elasticity
Residential Users of Electricity
Industrial Users of Electricity
Presented by: Andrea Bakeberg
Case Summary
July 2004: High temperatures in Shanghai resulted in increased power consumption
There were power shortages nationwide.
China is the second largest exporter of coal.
In 2004, the government limited coal exports to 80 million tons.
The government regulates the coal supply to power plants.
The government usually sets the contract price below the spot market price.
Many mines ignore the contracts and sell at the spot market price to obtain higher earnings.

Explain how the impact of a price increase on electricity consumption depends on the price elasticity of demand.
Electricity Consumption & Elastic Demand
In the case of elastic demand, an increase in the price of electricity would cause quantity demanded to fall by a greater percentage than the percent increase in price (Png 61).

The implication here is that a price increase of electricity would alleviate shortage issues.
Electricity Consumption & Inelastic Demand
Since the electricity market actually has inelastic demand, an increase in the price of electricity would result in a proportionately smaller decrease in the quantity demanded (Png 61).

The implication here is that a price increase for electricity would result in higher total expenditures on electricity. Quantity demanded would not decrease enough to alleviate shortage issues.
The degree to which quantity demanded changes with changes in price, depends on the price elasticity of demand (Png 61).
Recommendations for China's Power Shortage
Allow supply and demand to govern the electricity market.
Eliminate the contract prices for coal.
This will cause the supply curve to shift to the left resulting in higher prices

Increase enforcement to ensure organizations pay their debts and power bills.
DR- Changes in electric usage by end-use customers from their normal consumption patterns in response to changes in the price of electricity over time (Wikipedia).

Example- Allow customers to enroll in programs to receive financial incentives for reducing electricity consumption (Wang).
Use Demand Response (DR)
"Demand Response." Wikipedia. Wikimedia Foundation,
n.d. Web. 08 Feb. 2014.

Png, Ivan, and Dale E. Lehman. Managerial Economics.
3rd ed. Malden, MA: Blackwell Pub., 2007. Print.

Wang, Jianhui, Cary N. Bloyd, Zhaoguang Hu, and
Zhongfu Tan. "Demand Response in China." Energy 35.4 (2010): 1592-597. Web.
Works Cited
Additional Questions
& Discussion
Full transcript