Foreign direct investment in China's power sector: trends, benefits and barriers

Using data from an original survey of US private investors, official Chinese statistics, and other sources, we assess the volume and characteristics of FDI in China's power sector, its impact on energy efficiency, and the factors that limit this impact. Our five principal findings are as follows. First, the volume of FDI in China's power sector will likely fall short of the government's 1995 - 2000 capacity expansion target by a substantial margin, in part because of persistent institutional barriers to FDI. Second, to avoid the lengthy central government approval process for large plants and to minimize risk, early FDI tended to be in small-scale, gas- and oil-fired plants using imported equipment and located in coastal provinces. However, more recent FDI tends to be in larger coal-fired plants that use more Chinese equipment and tends to be located in the north as well as the east. Third, and perhaps most important, FDI is likely having a significant positive impact on energy efficiency. Almost a third of the 20 FDI plants in our survey sample use advanced efficiency-enhancing generating technologies, and a fifth are cogeneration plants. Fourth, the main factor that has hampered the contribution of FDI to energy efficiency is an institutional bias in favor of small-scale plants which are generally not as energy efficient as the large-scale plants. And finally, the most important institutional barriers to FDI generally are uncertainty associated with the approval process for FDI projects, electricity sector regulation, and the risk of default on power purchase contracts. (C) 2000 Elsevier Science Ltd. All rights reserved.