Why Do Electricity Utilities Cooperate with Coal Suppliers? A Theoretical and Empirical Analysis from China

Abstract

The asymmetry of Chinese coal and electricity pricing reforms leads to serious conflict between coal suppliers and electricity utilities. Electricity utilities experience significant losses as a result of conflict: severe coal price fluctuations, and uncertainty in the quantity and quality of coal supplies. This paper explores whether establishing cooperative relationships between coal suppliers and electricity utilities can resolve conflicts. We begin with a discussion of the history of coal and electricity pricing reforms, and then conduct a theoretical analysis of relational contracting to provide a new perspective on the drivers behind the establishment of cooperative relationships between the two parties. Finally, we empirically investigate the role of cooperative relationships and the establishment of mine-mouth power plants on the performance of electricity utilities. The results show that relational contracting between electricity utilities and coal suppliers improves the market performance of electricity utilities; meanwhile, the transportation cost savings derived from mine-mouth power plants are of importance in improving the performance of electricity utilities.