Resource Misallocation in Electricity Sector: Reform and Policies in China

China has made a firm commitment to achieving carbon neutrality by the middle of this century. To achieve this, reform of the current energy system, especially the electricity sector, is needed. In other words, transforming the traditional fossil fuel-based sector into a renewables-dominated system is critical, and efficient resource allocation among different power sectors is an important way to achieve energy transition. However, resource misallocation in China’s electricity sector leads to significant negative economic consequences. This chapter thus extends the Hsieh and Klenow (2009) framework and applies it to enterprise-level data to model resource misallocation in China’s electricity sector. We find that resource misallocation in electricity sector not only brings about inefficiencies but also affects the progress of the energy transition. Further marketisation reform is important to resolve the problem.