Cost pass-through in China's retail electricity market: a comparative analysis of vertically integrated and independent retailers

Abstract

This study examines the cost pass-through behavior in China's retail electricity market by comparing vertically integrated and independent retailers. Using a unique monthly panel dataset covering 34 provincial regions and 340 retail pricing plans) 10 retailers × 34 province) from 2018 to 2023, the study disaggregates upstream electricity costs into generation costs proxied by futures market prices and regulated transmission and distribution charges (“lines costs”). The empirical analysis, based on fixed effects panel regressions, reveals that independent retailers exhibit significantly higher pass-through rates, particularly for generation-related expenses, while vertically integrated firms demonstrate pricing stability due to internal hedging strategies. The findings further indicate that lines costs are more uniformly passed through across all firm types due to their regulated and predictable nature. Transmission length, transformer size, and customer population are important infrastructure factors influencing the price of electricity. This research sheds light on the firm's structural configuration, the regulatory environment and the firms costs and how the three are interrelated to explain price behavior under mixed markets for electricity. The contribution of the study will inform policymakers on the issue of electricity market liberalization and the necessary tools to implement it. This is particularly important for developing countries that are shifting to the liberalized competitive retail model.