China, with the largest electricity consumption market in the world, is in the process of market-oriented reform on its electricity industry and trying to encourage energy saving and enhance energy efficiency by implementing nonlinear pricing mechanisms. This thesis broadly investigates such policies through three related essays.

The first essay investigates how Chinese households have responded to new nonlinear pricing schemes and estimates the price and income elasticities of demand. I use three complementary approaches. Based on an extensive household-level administrative dataset, I first perform a bunching test to see if consumers appear to be responding to non-linear pricing. Second, I estimate a double-log demand function using household-level consumption data during peak and off-peak time. I use instrumental variable techniques to address issues of endogeneity. Third, using survey data with extensive information about the stock of energy-using durables owned by households, combined with monthly usage records, I fit a structural model that includes time-of-use and increasing block rates pricing. I find evidence of remarkable heterogeneity in the price and income elasticities, depending on the stock of appliances, income level, and total electricity consumption. This provides support for the notion that increasing block rates give stronger incentives to households with higher consumption levels. Policy simulations under two alternative scenarios show that households do decrease their total electricity consumption significantly when the pricing schemes change from uniform pricing to non-linear pricing such as time-of-use pricing and increasing block rates.

The second essay investigates the vertical integration economies between transmission and distribution of the electricity industry. Using unique administrative cost data of 24 province utility companies in China, I first estimate a quadratic cost function. To investigate the vertical integration economies thoroughly, I define transmission and distribution based on three counterfactual scenarios, treating the 220kV and above network, 110kV and above network, 35kV and above network as transmission under the first, second, and third scenarios respectively. Then I estimate the vertical integration economies under these three scenarios. Results show that there do exist significant vertical integration economies and that the vertical integration economies have grown over time. I also find evidence of remarkable heterogeneity in the vertical integration economies. Utility companies with high consumption intensity have larger vertical integration economies. Also, vertical integration economies are larger under the first scenario than the second and third scenarios. All these results support the conclusion that currently, the separation of transmission and distribution would cause significant cost increase, which will be transferred to end consumers.

The third essay investigates how stock prices of generation companies and major industrial electricity users react to the electricity on-grid and retail tariff adjustments and announcements of future market-oriented reform plans in China using the event-study method. Attention is restricted to publicly listed generation companies and major industrial electricity users. Using two different windows periods (5 business days before and after the events, the short-term, and 10 business days before and after the events, the mid-term), I find that stock prices do not respond significantly to the announced future reform plans. This may betray the consumer’s belief that future reform plans will not be implemented effectively and thoroughly in China. By contrast, the stock prices of generation companies and major electricity consumers do react significantly and negatively to tariff adjustments in both the short- and the mid-term.