The institutional power shortage in China: Capacity shortage or capacity under-utilisation?

China has experienced off-seasonal power shortages in recent years, where the growth in capacity supply exceeds the power demand. This paper investigates the mechanism of power shortages in China by estimating the capacity expansion and capacity utilisation models with the annual data of 30 provinces from 2006 to 2011. With the theoretical and empirical evidence, we find that: (1) the mechanism of the power shortages in China could be twofold: the capacity shortage and the capacity under-utilisation, where the two can have a combined effect on shaping the power supply pattern in China and (2) the ‘coal-price-inflation-internalising’ policy employed by the state to solve the ‘coal-electricity’ conflict leads to the short-run power shortage and also distorts the market demand signal of the capacity utilisation for the power firms to make long-run investment decisions. [ABSTRACT FROM AUTHOR]