Utilities Policy 10 (2001) 75–83

www.elsevier.com/locate/utilpol

A data envelopment analysis of the efficiency of China’s thermal

power generation
Pun-Lee Lam a,∗, Alice Shiu a
a
Department of Business Studies, The Hong Kong Polytechnic University, Hung Hom, Kowloon, Hong Kong Special Administrative Region,
China

Received 11 January 2002; received in revised form 2 September 2002; accepted 8 September 2002

Abstract

This study applies the data envelopment analysis (DEA) approach to measure the technical efficiency of China’s thermal power
generation based on cross-sectional data for 1995 and 1996. Our results show that municipalities and provinces along the eastern
coast of China and those with rich supplies of coal achieved the highest levels of technical efficiency. There is no clear evidence
of excess capacity. However, the presence of labor slack in many regions indicates that labor redundancy was a serious problem.
In our second stage regression analysis, we find that fuel efficiency and the capacity factor significantly affect technical efficiency.
Provinces and autonomous regions that were not under the control of the State Power Corporation (SPC) achieved higher levels
of efficiency. The presence of foreign investment, however, did not have a significant effect on efficiency.
 2002 Elsevier Science Ltd. All rights reserved.

JEL classification: L5; Q4

Keywords: DEA approach; technical efficiency; China’s thermal power generation

1. Introduction sector are lacking, mainly due to insufficient data about

The electric power industry in China has been under
state ownership and control since 1949. At present, the
state sector owns all of the transmission lines and nearly
all of the distribution networks. It also accounts for most
of the power generation. Since the 1980s and the adop-
tion of an open-door economic policy, structural reforms,
market incentives, and decentralization policies were
introduced to attract investment into the power sector.
Local governments and power enterprises co-operated
with foreign investors to form independent power pro-
ducers (IPPs). From that time, generating capacity in
China has expanded rapidly.
Today, China is the world’s second largest producer
of electric power, both in terms of installed capacity and
actual generation. Despite its growing importance,
empirical studies on the productivity of China’s power
∗
Corresponding author. Tel.: 852-2766-7123; fax: 852-2765-0611.
E-mail address: bupllam@inet.polyu.edu.hk (P.-L. Lam).
the factor inputs that are used in the power sector. In
recent years, the Chinese authorities have begun to pub-
lish more information about the production and perform-
ance of the power sector over time, and across different
regions. With more information available, the way is
opened for efficiency analyses of China’s power sector.
China relies heavily on thermal power generation,
which accounts for three-quarters of the total generating
capacity. In this study, we apply data envelopment
analysis (DEA) to measure the cross-sectional efficiency
of China’s thermal power generation. We also conduct a
second stage regression analysis to identify the important
factors that affect the performance of thermal power gen-
eration in China. Our empirical results shed light on the
environmental factors that affect generation efficiency,
which will provide useful information for the restructur-
ing of the generation market in China.
This paper is organized as follows. In Section 2 we
outline the current structure of the electric power indus-
try in China. In Section 3 we review the results of the
efficiency measurement of power industries in various

0957-1787/02/$ - see front matter  2002 Elsevier Science Ltd. All rights reserved.
PII: S 0 9 5 7 - 1 7 8 7 ( 0 2 ) 0 0 0 3 6 - X
76 P.-L. Lam, A. Shiu / Utilities Policy 10 (2001) 75–83
countries. Section 4 describes our methodology, and we
report our results in Section 5. The last section provides
conclusions and discusses the implications of our empiri-
cal results for China’s thermal power generation.
2. China’s power industry
China’s electric power industry came into existence
in 1882, with the establishment of the country’s first gen-
eration plant in Shanghai (Ministry of Energy, 1989;
Contemporary China Press, 1994; Economic Manage-
ment Press, 1997). In the early years of the industry’s
development, electric power systems expanded very
slowly. Most power generating units were of small
capacity with low thermal efficiency, and were concen-
trated in a few large cities in the coastal regions. Power
supply to the interior provinces was very limited
(Ministry of Energy, 1989).
Since 1949, electric power in China has been under
state ownership and control. The state sector presently
owns all transmission networks. From the 1950s to
1970s, the transmission networks expanded from the
coastal regions to the interior areas, and from the cities
to the extensive countryside. In the 1980s and 1990s,
after China adopted an open-door economic policy,
structural reforms, market incentives, and decentraliz-
ation policies were introduced to attract investment into
the power sector. Since then, the country’s installed gen-
erating capacity and total annual generation have
increased rapidly. During the past decade, the Chinese
government has allowed foreign companies to participate
in building up the country’s generating capacity. Despite
the remarkable growth in electricity generation that has
been experienced over the last two decades, the per cap-
ita consumption of electricity in China is still low when
compared to consumption in developed countries. Fur-
thermore, distribution is uneven; while many areas of
the country continue to suffer from power shortages, a
few areas are oversupplied.
To date, there are seven regional power networks and
five independent provincial power grids in China. The
generation, transmission, and distribution of electricity
in different areas are vertically integrated and under the
management of a public monopoly. Regional and prov-
incial state-owned power enterprises are responsible for
the construction, management, and operation of electric
power systems.
The system of state-owned enterprises (SOEs) was
established after the Communist Party took power in
1949 (Chow, 1997). Since then, the state sector has
dominated the economy and suffered chronic problems
of mounting losses, huge borrowing, and low pro-
ductivity. SOEs have had to shoulder the social responsi-
bility of creating employment, and providing employees
with various kinds of fringe benefits and service facilities
such as housing, education, and medical care (Zhu,
1999). As a result of this social burden, SOEs in China’s
electric power industry are grossly unproductive. At
present, China’s power sector employs more than 2
million workers, and the problem of redundancy is
very serious.
In recent years, the power industry’s SOEs have been
corporatized and converted into “independent holding
companies”, which are responsible for the economic
management and planning of their respective regions. At
the provincial level, power corporations are separated
from the power bureaus. Since restructuring, all power
corporations, be they at the regional or provincial level,
operate under commercial principles and no longer
receive large government subsidies. To obtain new capi-
tal for expansion, some power companies have issued
shares to private shareholders, and publicly traded shares
are available to foreign investors. It is hoped that corpor-
atization and listing on the stock market will create
greater pressure on SOEs in the power sector to
improve efficiency.
In January 1997, the State Council formed the State
Power Corporation of China (SPC), which is the largest
power corporation in China. The functions of running
state-owned assets and enterprise management that were
formerly undertaken by the Ministry of Electric Power
(MEP) were transferred to the SPC upon its formation.
The SPC is now responsible for the construction of
power networks nationwide, as well as the operation and
management of inter-regional and inter-provincial power
grids and large-scale power plants. Most of the regional
and provincial power corporations are under the control
of the SPC, except those in Guangdong, Hainan, Inner
Mongolia, and Xizang (Tibet), which are controlled by
their provincial governments.
Thermal power and hydropower have long been Chi-
na’s dominant generating capacities. In 1999, they
accounted for 75.7% and 23.5% of the total capacity
respectively (China Electric Power Information Center,
2000). The share of nuclear power in total capacity was
only 0.8%. Although China has a large potential for hyd-
ropower, less than 20% of it is exploited. Of the thermal
generating capacity, approximately 90% is coal-fired,
and the combined share of oil and gas fired capacity is
only 10%.
In the 1980s and the early 1990s, the local govern-
ments in China constructed a lot of small power plants
with a capacity less than 50 MW, which did not require
approval from the central government (Wirtshafter,
1990; Yang and Yu, 1996). This policy of decentraliz-
ation provided incentives and flexibility for local govern-
ments to expand generating capacity quickly. However,
the wide use of low quality fuel for power generation
and the proliferation of small generating units reduced
the thermal efficiency of China’s energy sector. The
average thermal efficiency of electricity generation in
 P.-L. Lam, A. Shiu / Utilities Policy 10 (2001) 75–83
fossil fuel plants ranges between 27% and 29%, com-
pared to around 38% in Organization for Economic
Cooperation and Development (OECD) countries
(Economic Management Press, 1997; Financial Times
Energy, 1999). The development of hydropower and the
improvement in the energy efficiency of coal-fired plants
will help to improve the economic and energy efficiency
of China.
3. Previous productivity studies of power
generation
Since the early 1960s, there has been a growing inter-
est in measuring the productivity and efficiency of the
power sector. Different methods have been used to mea-
sure technological change and economies of scale. In the
early period, the technological change of the power
industry was measured by studying shifts in production
and cost functions (e.g. Komiya (1962); Nerlove (1963);
Barzel (1963, 1964); Dhrymes and Kurz (1964);
McFadden (1964); Galatin (1968); Courville (1974);
Cowing (1974); Boyes (1976); Christensen and Greene
(1976).1 In the 1970s, empirical studies of productivity
tended to focus on the effect of ownership structure on
efficiency. De Alessi (1974) explored the economic
consequences of government ownership and regulation
in the electric power industry of the U.S. Meyer (1975)
investigated the comparative efficiency of private and
public electric utilities in the U.S. He used a dummy
approach to pool both private and public firms and meas-
ure the cost difference due to ownership structure, with-
out taking factors such as input prices and technology
into account.
Pescatrice and Trapani (1980) also used a dummy
variable to measure the productivity difference between
private and public electric utilities in the U.S. Unlike
Meyer’s study, however, they used a translog function
that controlled the effects due to output, input prices,
and technology. Their results suggested that the unit cost
of public firms was 24–33% lower than that of private
firms. The source of inefficiency was due to the rate-of-
return constraints that were imposed on privately-owned
electric utilities. The study that was conducted by Dilor-
enzo and Robinson (1982) indicated similar results,
while that of Atkinson and Halvosen (1986) indicated
that price inefficiency existed in both public and private
electric utilities.
More recently, frontier methods such as data envelop-
ment analysis (DEA) and stochastic frontier analysis
(SFA) have been used to measure efficiency and pro-
ductivity. The DEA approach is non-parametric, whereas
1 2
Cowing and Smith (1978) survey econometric analyses of steam-
electric generation based on production and cost functions.
77
the SFA is a parametric approach. The DEA approach
does not require the arbitrary assumptions regarding the
functional form or the distributional form of the error
terms that the SFA approach uses,2 and it is more suit-
able for handling the multiple inputs and outputs of the
power industry. Both approaches are susceptible to data
measurement errors, but the SFA approach has
additional problems of specification errors and omitted
variables.
Since the early 1980s, economists have applied the
DEA approach to measure the productivity performance
of electric utilities under different ownership structures.
Instead of using cost and production functions, they
specify and construct a piecewise linear technology from
the observed input and output data. Productivity
measurement is used to evaluate the performance of the
power industry under different ownership structures and
regulatory regimes.
The use of the DEA approach not only allows us to
compare individual firms to best practice firms, but also
to identify sources of inefficiency. Such benefits allow
regulators to formulate policies on deregulation and priv-
atization, and to determine the appropriate productivity
factor when imposing price-cap regulation or yardstick
competition on electric utilities. The DEA-like linear
programming methods have been applied to measure the
productivity of the power sector in the U.S. and in other
countries. Unlike parametric analyses, which focus on
generation, both generation and transmission and distri-
bution have been covered in studies using the DEA
approach.
Fare et al. (1985) were the first to use the DEA
approach to compare the efficiency of public and private
electric utilities. They used the data from Atkinson and
Halvorsen’s study, and found that public utilities were
more efficient than private utilities, and that inefficiency
was largely due to the lack of allocative efficiency. Cote
(1989) applied the stochastic frontier cost function to
estimate the technical efficiency of electric utilities under
different ownership structures. His results suggested that
co-operatives were the most efficient type of ownership
structure, while small private and public electric utilities
had similar levels of technical inefficiency.
Fare et al. (1990) used the Malmquist productivity
index to study the productivity growth of 19 coal-fired
generating plants in Illinois from 1975 to 1981. They
found that the average rates of productivity growth were
relatively stable, except during a productivity slowdown
from 1976 to 1977. Pollitt (1995) found no significant
differences in efficiency between different types of own-
ership or economic organization in a study of generation
utilities in OECD countries. Coelli (1997) applied both
Refer to Lovell (1996) for a review of the ability of the SFA and
DEA approaches to measure efficiency and productivity change.
78 P.-L. Lam, A. Shiu / Utilities Policy 10 (2001) 75–83

the DEA and SFA approaches to measure the total factor The above model imposes constant returns to scale
productivity (TFP) change of 13 base-load, coal-fired
冘
K

plants in Australia from 1981–1982 to 1990–1991. The (CRS). If the condition of zkt ⫽ 1 is added, then
empirical results suggested a TFP growth over the 10- k⫽1

year period of up to 16%. Olatubi and Dismukes (2000) variable returns to scale (VRS) are imposed (see Fig. 1).
used the DEA approach to measure cost efficiency In Fig. 1, DMUs A, C, and D are considered relatively
opportunities for coal-fired generation facilities in the efficient under VRS, whereas only DMU C is considered
U.S., and found that allocative inefficiency was the most relatively efficient under CRS. They all have technical
important source of inefficiency in 1996. efficiency scores of 1, which implies that they are
The DEA approach has also been applied to measure operating on the best practice frontier. DMU F is con-
efficiency in electricity transmission and distribution sidered as relatively inefficient under both kinds of
(e.g. Weyman-Jones (1991); Miliotis (1992); Hjalmars- returns to scale. Under CRS, the output-oriented techni-
son and Veiderpass (1992a, 1992b); Bagdadioglu et al. cal efficiency score for DMU F is given by TEo,crs =
(1996); Kumbhakar and Hjalmarsson (1998)). ZF/ZK, whereas under VRS, the output-oriented techni-
cal efficiency score for DMU F is given by TEo,vrs =
ZF/ZS. In our study, we assume VRS in power gener-
4. Methodology ation.
Consider the VRS frontier in Fig. 1. One section runs
In this study, our focus is on technical efficiency. The parallel to the horizontal axis (i.e. DE), and this feature
non-parametric DEA approach is used to compute the could lead to the presence of input slack, which is the
technical efficiency of China’s thermal power gener- extent to which inputs could be further reduced even
ation. The use of the DEA does not require any specifi- when a DMU is projected onto the production frontier.
cation of the functional form of the production relation- Consider inefficient DMU G. Even when G is projected
ship. Given the inputs that are used and the output that onto the frontier, one can further reduce the amount of
is produced, the prior weighting of the relative impor- input (i.e. DH) and produce the same level of output.
tance of outputs and inputs is not required. DEA ana- This amount of DH is known as input slack.3
lyzes each decision-making unit (DMU) separately and
identifies those which exhibit best practice. A frontier of
these units is then constructed, and the efficiency meas- 5. Data and results
ure of each DMU is determined relative to this best prac-
tice frontier. Those DMUs that lie on the frontier are Detailed information about the power generation of
regarded as relatively efficient and have scores of 1, thermal power plants in China, like total output, generat-
whereas those that lie inside the frontier are regarded as ing capacity, and fuel consumption can be obtained from
relatively inefficient and have scores of less than 1 but
greater than 0.
The DEA model can be applied in an input or output
orientation. In this study, we use an output-orientation
for measuring the provincial efficiency for electricity
generation. Suppose we have k = 1,…, K number of
firms which produce M outputs, i.e. ym, kt, m = 1,…, M,
using N inputs, xn, kt, n = 1,…, N, at each time period t,
where t = 1,…, T. zkt represents the intensity levels,
which make the activity of each observation expand or
contract to construct a piecewise linear technology.
Ft0(xkt,ykt) ⫽ maxd represents the output-oriented Farrell
efficiency measure that indicates the maximum possible
expansion of yt for firm k at period t.
Ft0(xkt,ykt) ⫽ maxd,

冘
K

st dym,ktⱕ zktym,kt m ⫽ 1,…,M, Fig. 1. Graphical illustration of the DEA approach and the presence
k⫽1
of input slacks.
(1)
冘
K

zktxn,ktⱕxn,kt n ⫽ 1,…,N, 3
We used the DEAP software to compute the DEA models and the
k⫽1
labor slack. The slack was calculated using the multi-stage method that
zktⱖ0,k ⫽ 1,…,K is discussed by Coelli et al. (1998).
 P.-L. Lam, A. Shiu / Utilities Policy 10 (2001) 75–83
Table 1
Summary statistics for 30 DMUs in China’s generation
Electricity Electricity generated Generating capacity
generation (GWh)b (MW)b
1995
Mean 26911.47 5431.35
S. D. 21231.48 4291.36
Minimum 165.00 47.10
Maximum 73676.00 16260.40
1996
Mean 29270.03 5962.12
S. D. 22798.49 4702.97
Minimum 133.00 55.70
Maximum 79223.00 19723.30
a
Labor refers to the number of workers engaged in thermal power generation in the power sector.
b
GWh refers to gigawatt hours, MW refers to megawatt and TJ refers to terajoule.
the Annual Report of Electricity Industry that is pub-
lished by the China Electricity Press. However, the
report only provides the total labor input for the power
industry, and does not provide separate figures of the
labor input for thermal power generation. Fortunately,
we were able to locate the figures for 1995 and 1996 in
China’s Industrial Markets Yearbook (Li and Tse, 1997
and 1999), and our study covers those two years.
Our cross-sectional study covers 30 provinces, auton-
omous regions, and municipalities, each of which is con-
sidered as a Decision Making Unit (DMU). The data that
is available allows us to measure the technical efficiency
scores of the different DMUs in each of the two years.
Electricity that is generated from thermal power plants
in each DMU is used as the output variable, while capi-
tal, fuel, and labor are the three inputs. Capital is meas-
ured in terms of installed thermal generating capacity
in megawatt (MW). Fuel consumption is measured in
terajoules (TJs). The different fuels (such as coal, oil,
and gas) that are used for power generation are converted
into TJ equivalents, and then aggregated to obtain the
amount of fuel input. Labor input is the number of work-
ers in thermal power generation.
Table 1 shows the summary statistics for the output
and inputs that were used to construct the DEA models.
The construction of the models allows the investigation
of relative efficiency scores and the presence of slack in
each year for power generation. The results for each
cross-sectional DEA model for 1995 and 1996 are shown
in Table 2. The average efficiency score increased from
0.888 in 1995 to 0.903 in 1996. The technical efficiency
scores show great variations among DMUs. Eight prov-
inces (Beijing, Hebei, Shanghai, Jiangsu, Shandong,
Guangdong, Xizang, and Ningxia) operated along the
production frontier in both years. Municipalities and
provinces along the eastern coast achieved higher levels
79
Total fuel used Labor
(TJ)b (Number of persons)a
456012.21 25676.67
335372.61 18897.22
79.55 315.00
1153665.52 71280.00
487508.78 23691.30
353979.89 19471.14
293.08 198.00
1239205.20 75330.00
of technical efficiency. Provinces with rich supplies of
coal, such as Shanxi, Shandong, Hebei, and Henan, also
achieved higher levels of technical efficiency. The tech-
nical efficiency for Yunnan was the lowest among all of
the DMUs.
The input slack results are presented in Table 3. The
presence of slack reveals the scope for further non-radial
reduction in inputs once an inefficient DMU is projected
onto the production frontier. The excessive use of inputs
accounts for about 7.85–8.54% of total fuel and 11.10–
26.13% of total labor used in those DMUs with slacks.
Capital slack is insignificant, which implies that excess
capacity is not a serious problem in China’s power sec-
tor. Instead, the problem of power shortage continues to
exist in many provinces.
The amount of labor slack increased substantially
from 1995 to 1996. As compared to the efficient pro-
duction frontier, some DMUs faced serious problems of
labor redundancy. In 1996, the labor input for each DMU
with slack could have been reduced by an average of
6,312 without affecting output. The sharp increase in
labor slack might have been due to the restructuring of
the power sector in 1996 and the subsequent formation
of the SPC in 1997. In the face of restructuring, state-
owned power enterprises in some provinces were quick
to shed labor to improve their efficiency. As a result,
labor productivity became more diverse among DMUs.
However, it should be emphasized that the problem of
labor redundancy would become much more serious if
we were to compare China’s power sector to the best
performance that was achieved by power companies in
other developed countries.
Once we computed the cross-sectional efficiencies, we
performed the second stage (Tobit) regression analysis
to identify factors that might influence technical
efficiency. In our regression model, the estimated cross-
80 P.-L. Lam, A. Shiu / Utilities Policy 10 (2001) 75–83

sectional efficiency score (EFF-SCORE) for 1996 is Table 3

regressed on a number of potentially influencing exogen- Summary statistics of slack variables
ous factors. The specific vector of variables that are used
Input No. of DMUs Mean (amount % of slack in
include capacity factor (CAPACITY), fuel use per kWh with slacks of slack per total input
of electricity (FUEL), the average size of generating DMU)
units (SIZE), the average age of generating units (AGE),
and two dummy variables. The two dummy variables are Capacity
used to indicate whether the region is under the control 1995 1 21.9 2.17
of the SPC (0 = not under SPC control and 1 = under 1996 0 0 0
Fuel
SPC control) and the presence of foreign investment in 1995 8 41017 7.85
the power sector (FOREIGN) (0 = without foreign 1996 3 39000 8.54
investment and 1 = with foreign investment). Labor
Because of the lack of information about the load fac- 1995 9 2923 11.10
tors (i.e. average load divided by peak load) of all prov- 1996 17 6312 26.13
inces, we used capacity factor (i.e. average load divided
by installed capacity) to measure the impact of load
characteristics on generating efficiency. If the installed
capacity is planned to meet the peak load, then the
capacity factor will be highly correlated with the load

Table 2
Cross-sectional variable returns to scale (VRS) DEA efficiency scores

DMU Efficiency scores for 1995 Efficiency scores for 1996

Northern Region
Beijing 1.000 1.000
Tianjin 0.890 0.845
Hebei 1.000 1.000
Shanxi 0.971 0.973
Inner Mongolia 0.825 0.883
North Eastern Region
Liaoning 0.910 0.895
Jilin 0.832 0.950
Heilongjia 0.852 0.838
Eastern Region
Shanghai 1.000 1.000
Jiangsu 1.000 1.000
Zhejiang 0.856 0.891
Anhui 1.000 0.969
Fujian 0.940 0.956
Jiangxi 0.743 0.758
Shandong 1.000 1.000
Southern Region
Henan 0.970 0.968
Hubei 0.836 0.749
Hunan 0.822 0.801
Guangdong 1.000 1.000
Guangxi 0.685 0.713
Hainan 0.719 1.000
South Western Region
Sichuan 0.848 0.841
Guizhou 0.834 0.896
Yunnan 0.661 0.647
North Western Region
Xizang (Tibet) 1.000 1.000
Shaanxi 0.936 0.940
Gansu 0.991 0.989
Qinghai 0.694 0.767
Ningxia 1.000 1.000
Xinjiang 0.813 0.825
Average 0.888 0.903
 P.-L. Lam, A. Shiu / Utilities Policy 10 (2001) 75–83 81

factor of a region. It is expected that a higher capacity
factor (CAPACITY) will better utilize the existing gen-
erating capacity, and this will increase the efficiency
score.
The quality of fuel that is used for power generation
in different power plants will definitely affect the
efficiency of thermal power generation. Although infor-
mation about the heat content of fuel (e.g. in terms of
joules per kilogram of coal) is not available, the power
enterprises in different provinces have published data on
fuel use (in terms of standard coal in grams) per kWh
of electricity. If the fuel that is used for power generation
is of lower quality (in terms of heat content), then the
fuel use per kWh of electricity will be higher. It is
expected that the relationship between the efficiency
score and the fuel use (FUEL) is negative. Higher fuel
use implies a lower quality of fuel, which will lower the
efficiency score.
As mentioned earlier, the thermal efficiency of power
plants in China is low because of the proliferation of
small generating units constructed in the 1980s and the
early 1990s. Power enterprises in China only provide
information about the operating characteristics of gener-
ating units with a capacity of 100 MW or above, infor-
mation about smaller units is not available. Therefore,
our data on the average size (SIZE) and age (AGE) of
generating units are based on information from those
units with a capacity of 100 MW or above, which
accounted for almost 60% of the total capacity. Data for
three DMUs (Hainan, Qinghai and Xizang) are not avail-
able, hence we only have 27 observations when the vari-
ables SIZE and AGE are included. In the light of this
data limitation, the estimated coefficients for these two
variables should be interpreted with caution. To measure
the effect of small units on efficiency scores, we add a
variable SMALL, which is defined as the proportion of
generating units smaller than 100 MW, in our second
stage (Tobit) regression analysis.
The results of our second stage regression are shown
in Table 4. As expected, the coefficients for CAPACITY
and FUEL have significant effects on the technical
efficiency of DMUs. A higher capacity factor means a
higher utilization rate of generating capacity, which
could save capital investment and help to achieve a
higher level of technical efficiency. The use of high qual-
ity fuel (which implies a smaller amount of fuel use) has
also raised the technical efficiency. Our results show that
DMUs that were independent of the SPC achieved
higher levels of technical efficiency, while the presence
of foreign investment (FOREIGN) did not have any sig-
nificant effect on technical efficiency. Based on the sam-
ple data of generating units with a capacity of 100 MW
or above, the size and age of generating units are not
significant factors in the technical efficiency of thermal
power generation. A surprising result is that the variable
SMALL is positive and significant, which implies that
a wider use of small generating units in a province has
increased efficiency. These small units are less efficient
than large units in terms of size and fuel use, but since
they are not subject to tight control by provincial and
central governments, their flexibility in operations and
labor recruitment might have increased their overall
efficiency.
6. Conclusions and implications
This paper examines the technical efficiency of Chi-
na’s thermal power generation industry. We apply the

Table 4
Regression analysis of technical efficiency

Variable Coefficient Coefficient Coefficient Coefficient

CONSTANT 1.5626∗∗∗ (0.3009)h 1.4843∗∗∗ (0.3085)h 1.0307∗∗∗ (0.3927)h 1.6591∗∗∗ (0.3066)h

CAPACITYa 0.3646∗ (0.2069)h 0.5554∗∗∗ (0.1946)h 0.5457∗∗∗ (0.1822)h 0.6090∗∗ (0.2656)h
FUELb ⫺0.0017∗∗∗ (0.0006)h ⫺0.0022∗∗∗ (0.0006)h ⫺0.0013∗ (0.0008)h ⫺0.0027∗∗∗ 0.0008h
SPCc ⫺0.2015∗∗∗ (0.0722)h ⫺0.0621 (0.0657) ⫺0.0787 (0.0636) ⫺0.1632∗∗ (0.0732)h
FOREIGNd 0.0138 (0.0416) 0.0119 (0.0347) 0.0142 (0.0332) ⫺0.0147 (0.0444)
SIZEe 0.0001 (0.0004) 0.0004 (0.0003)
AGEf 0.0107 (0.0065)
SMALLg 0.2624∗ (0.1421)h
R2 0.5186 0.5561 0.5942 0.5193
No. of observations 30 27 27 30

a
CAPACITY = capacity factor (average load divided by installed capacity).
b
FUEL = fuel use (in terms of standard coal) per unit of electricity generated.
c
SPC = 1 for provinces under SPC control, it is equal to 0 otherwise.
d
FOREIGN = 1 for provinces with foreign investment, it is equal to 0 otherwise.
e
SIZE = average size of thermal generating units with capacity 100 MW or above.
f
AGE = average age of thermal generating units with capacity 100 MW or above.
g
SMALL = proportion of generating units smaller than 100 MW.
h
∗∗∗, ∗∗, ∗ Significant at 1%, 5% and 10%, respectively; standard errors are in parentheses.
82 P.-L. Lam, A. Shiu / Utilities Policy 10 (2001) 75–83
DEA approach to measure the technical efficiency of dif-
ferent regions in China. Our study involves 60 obser-
vations from 30 provinces, autonomous regions, and
municipalities in 1995 and 1996. Apart from comparing
the efficiency among different regions, our study exam-
ines the presence of input slack and the possible factors
that affect efficiency.
Our results show that there was a slight increase in the
average efficiency scores in the two years under study. In
general, municipalities and provinces along the eastern
coast and those with rich supplies of coal achieved
higher levels of technical efficiency. Consistent with pre-
vious studies, our results indicate that environmental fac-
tors affect efficiency scores, and any benchmarking
method should take these into consideration. There is no
clear evidence of excess capacity. However, the presence
of labor slack in many regions indicates that labor redun-
dancy is a serious problem.
In our second stage (Tobit) regression analysis, we
find that capacity factor and fuel efficiency are signifi-
cant factors affecting technical efficiency. Government
policies such as peak load pricing and demand-side man-
agement would help to improve the load curve and the
utilization rate of generating capacity. These policies
would help increase the technical efficiency of thermal
power generation. The policy of mandated closures of
inefficient diesel generating units would help to improve
the fuel efficiency of power generation. The presence of
foreign investment did not have any significant effect on
the efficiency scores. Hence, the inflow of foreign capital
into China’s power market seems to help overcome capi-
tal constraints rather than to transfer new technologies
and improve technical efficiencies.
The Chinese government has recently announced the
restructuring of the SPC, which will be divided into sep-
arate regional transmission companies and required to
divest its generating facilities. The generating assets of
the SPC will be divested to four or five IPPs, with the
aim of reducing the dominant power of the SPC. Our
results indicate that provincial power enterprises that are
independent of the SPC have achieved higher levels of
efficiency. Provinces with relatively more small generat-
ing units have also achieved higher levels of efficiency.
Most of these small units were constructed in the 1980s
and the early 1990s, without the approval of the central
government. Our results provide some support for
divestiture of the generating assets of the SPC and
relaxing the control of the central government on the
power sector. The policies of decentralization and
divestiture would help improve the performance of
power sector in different regions of China.
Acknowledgements
The authors would like to thank Guangdong Electric
Power for arranging a study visit in early 1999. We
would also like to thank Harry Wu at the Hong Kong
Polytechnic University, Rolf Fare at Oregon State Uni-
versity, Ziping Wu at Queen’s University, and parti-
cipants at the international workshop on the Chinese
economy for their valuable comments on earlier drafts.
Thanks are also due to Pat Lam and Alice Ng for their
assistance throughout the study. The work that is
described in this paper was supported by research grants
from the Hong Kong Polytechnic University (Project
A/C Code: G-T196) and the Research Grants Council of
Hong Kong (Project A/C PolyU 5213/01H).
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