Modern Economy, 2012, 3, 481-486
http://dx.doi.org/10.4236/me.2012.35063 Published Online September 2012 (http://www.SciRP.org/journal/me)
Is Thermal Power Plant Regulation in China Constructive?
Hongbing Li1, Ronghua Ju2*
1School of Geosciences and Resources, China University of Geosciences, Beijing, China
2College of Economics and Management, China Agricultural University, Beijing, China
Received May 8, 2012; revised June 7, 2012; accepted June 16, 2012
ABSTRACT
This paper analyzes main legal requirements for thermal power plants in China, which is intended to save energy and
reduce discharge by restricting coal consumption for power generation. However, based on our four cases of the selec-
tion of thermal power plant construction proposals, which provide the ideal contrast of two different regulation circum-
stances, we find that state-owned firms, which strictly follow th e regulations, cannot realize the efficien t use of energy
and capital. In contrast, private firms, which are more able to follow the principle of profit maximization and dare to
breach the regulation policy, can realize the efficient use of energy and capital. Then using the fixed-ratio production
function, this paper suggests regulation not only results in energy and capital waste, but also employment opportunity
loss. Expanding this conclusion, this paper proposes that the more regulation, the more employment opportunity loss.
Therefore, if the government can deregu late the regulated sectors, more labor can be combined with the capital of new
entrants, and the inco me distribution will be more equitable.
Keywords: Thermal Power Plant; Regulation; Employment Opportunity Loss
1. Introduction
The power sector is regulated heavily in China. There are
regulations on entry, technique, or price for power gen-
eration, transmission and sales. Thermal power plants
(TPPs) are just a part of the power sector, about which
this paper will consider the effect of regulation.
There are two contrasting opinions about government
regulation on economic activities, which are based on
different assumptions. One is the public interest theory of
regulation [1], which suggests that a free market has some
failures such as monopoly power, moral hazard, adverse
selection and externalities. Therefore, the government,
which is assumed to behave for social welfare maximi-
zation, should provide regulations to solve these market
failures. Another opinion is the public choice theory, w hi c h
assumes government regulators are rational and not al-
truistic. This opinion has two strands. One is the theory
of interest group, which considers that regulation is ac-
quired by the industry and is designed and operated pri-
marily for its benefit [2]. The other is the theory of rent-
seeking, suggests that regulation is pursued for the bene-
fit of politicians and bureaucrats [3-5]. Politicians use r e g u -
lation both to create rents and to extract them through
campaign contributions , vot es, and bribes.
Some empirical research has tested these theories. The
empirical results of Djankov et al., based o n d at a from 85
countries, demonstrate that countries with heavier regu-
lation of entry have higher corruption and larger unoffi-
cial economies, but not better quality o f public or private
goods [6]. Bertrand and Kramarz [7] studied the effects
of entry regulation on employment in the retail sector in
France, and find that entry regulation decreases retail
employment, partly due to the increase in concentration
and the ensuing price upturns.
In this paper, we summarize the main legal require-
ments for TPPs in China, th en analyze four firms’ sc heme
selection of thermal power plant construction to contrast
regulation and deregulation circumstances, and find that
regulation results in the firm’s energy waste. Based on
this finding, utilizing a Leontief function, we conclude
that the regulation result s i n empl oyment opportuni ty loss.
2. Several Concepts Related to Thermal
Power Plants
In order to better understand the context of TPP re g ulat i o n
in China, we will explain some basic concepts about TPPs.
A TPP may be either an independent firm, which
supplies products in the market, or a firm’s division,
which supplies products to other divisions of this firm. In
this paper, we mainly deal with the TPP affiliated to a
firm. There are two kinds of products in a TPP, power
and heat (steam or hot water, in most cases, steam). Steam
is the main product of a TPP, and power is the byproduct.
Firms may demand power or steam, but often both. They
*Corresponding a uthor.
C
opyright © 2012 SciRes. ME

H. B. LI, R. H. JU
482
can get power and steam from the market, or produce it
themselves. In most cases, firms build their own boilers
to produce steam, but whether they produce power thems-
elves depends on the econom ic and technical evaluation.
Steam can be categorized as high-pressure, medium-
pressure or low-pressure. When a firm needs steam of
different pressure levels, the boiler can only supply the
highest-pressure level, and the lower-pressure level steam
can be obtained by means of a Desuperheater and Decom-
pressor, a Back pressure Steam Turbine, or a Condense
Turbine with Extraction Steam. The latter two methods
are usually called cogeneration of heat and power. The
firm will lose usable power if it transforms the higher-
pressure steam to the lower-pressure one by means of a
Desuperheater and Decompressor, instead of the cogene-
ration of heat and power. Cogeneration can produce more
power than a Desuperheater and Decompressor. However,
the method of cogeneration requires more investment.
For the specific project, the firm should comprehensively
consider such factors as incremental investment, saved
out-purchasing power, power price, coat price, operating
hours, industry policy, etc. to decide which method shou l d
be taken. According to most of engineering practices, it
is favorable to select the method of cogeneration of heat
and power for the vast majority of firms and the whole
society. However, firms that would benefit from the
method of cogeneration do not necessarily select this
method. We will disclose the reason for a firm’s selec-
tion in the following parts.
3. Thermal Power Plant Regulation in China
TPP regulation in China is contained in some government-
tal regulations, see Table 1.
The above regulations are followed by TPPs. Regula-
tion 2 is the extension of regulation 1. Regulation 3, 4 and
5 contain the technical requirements, which provide for
the cases that: the power ratio of the TPP is 100%, and
genenral annual average thermal efficiency is more than
45%. For industrial users, if they meet one of above two
requirements, they should meet both. According to engi-
neering experience in China, if the general power ratio of
the TPP is more than 45%, the power ratio of power
generation is about 40%, and the standard coal consump-
tion for power generation is about 307 g/kwh. Providing
the power ratio for its own use is 13%, the reflected
standard coal consumption for power supply is 353 g/kwh.
Table 2 sets out the average standard coal consu mpt ion fo r
power generation of China and the United States.
The core contents of China’s TPP regulations stress
the index of thermal efficiency, which is an advanced
objective for the medium and small TPPs. The rush cons-
truction of TPPs caused the local governments not to
encourage the construction of medium and small TPPs
since 2004, and some provinces even prohibited the con-
struction. Therefore, the ratif ication of medium and small
TPPs becomes difficult. Some provinces only ratify Back
Pressure Steam Turbine just because it is easier to check
for the Government; other provinces don’t ratify any TPPs.
Regulation 6, promulgated by State Development and
Reform Committee and Ministry of Construction in 2007,
made the above trend of cautious ratification into law.
Compared with the former regulations, it kept the requi-
rement of thermal efficiency and the ratio of power
unchanged, and added three points, including:
 Encouraging the combination of cogeneration of heat
and power with comprehensive utilization;
Table 1. Regulations about thermal power plants.
No. Title of regulation Publishing government department Publishing date
1 An announcement approved and transmitted the State Economic and Trade Commission’s interim provision on several questions of
developing holistic utilization of resources by the State Council. The State Council. 1985
2 An announcement approved and transmitted the State Economic and Trade Commission’s interim provision on several questions of further
developing holistic utilization of resources by the State Council. The State Council. 1996
3 Several provisions on developing co-generation of heat and power. State Planning Commission, State Economic and Trade Commission, Ministry of Electric Power, Ministr y of
Construction. 1998
4 Provisions on developing co-generation of heat and power. The State Planning Commission, State Economic and
Trade Comm ission, Ministry of Construction. 2000
5 Technical regulations on feasibility study of co-generation project. The State Planning Commission, State Economic and
Trade Comm ission, Ministry of Construction. 2001
6 Provisional regulation of management of projects of co-generation
and generation by holistic utilization of coal gangue. National Development and Reform Commission, Ministry of Construction. 2007

H. B. LI, R. H. JU 483
Table 2. Average standard coal consumption for power
generation of China and the United States (g/kwh).
Year 1998 1999 2000 2001
China 373 369 363 360
United States 346 342 340 357
 Encouraging Back Pressure Steam Turbines, and Con-
dense Turbine with Extraction Steams not less than
200 MW;
 Encouraging combining cogeneration of he at and power
with local heating supply.
However, so many encouragements result in prohib ition.
The causes are as follows:
 The firm that requires cogeneration of heat and power
may not have resources such as coal gangue, coal
slurry, coal gas, etc. to use comprehensively.
 The thermal efficiency of the Back Pressure Steam
Turbines is higher, but t he po wer generat i on l oad floats
with the heat load variation, which makes the power
generation unstable. Therefore, firms would choose the
Back Pressure Steam Turbines acco mpanied by Cond-
ense Turbine with Extraction Steams to keep the heat
and electricity stable. If the Back Pressure Steam Tur-
bine is only ratified, how can the Condense Turbine
with Extraction Steam be obtained? It is worthy to
encourage Condense Turbine with Extraction Steams
not less than 200 MW, but where are the huge heat
load and the enormous amount of fund going to come
from?
 Regional heating is mostly supplied by the gover-
nment, but cogeneration of heat and power is mostly
done by enterprise. It is difficult to combine them,
although the government encouraged their combina-
tion. In fact, these combina tions mostly use the fa lsel y
documented regional h eating supply to approve ge nuine
cogene ration of heat an d power proj ec t.
The core of cogeneration policy is to restrict standard
coal consumption. According to engineering experience,
energy consumption accounts for about 75% of the cost
of power generation, therefore, reducing the standard
coal consumption could decrease the cost of power gene-
ration. The intention of the government regulation is to
decrease the cost of power generation by setting the ceilin g
for standard coal consumption, which would be a good
thing. However, can this objective b e realized by the req-
uirement of governmental regulations? We shou ld c o n t i n u e
to analyze the measurement of coal consumption.
Both coal consumption of power generation and the
average annual thermal eff iciency can’t be found by si m p le
product check and calculation. The power ratio is calcu-
lated by accumulating heat and power (sometimes influ-
enced by subjective factors). Due to these limitations, it
is impossible to judge whether the Condense Turbine
with Extraction Steam reaches the requirements for the
regulation of cogeneration in 1998. Therefore, the me-
dium-small Condense Turbine with Extraction Steams is
basically prohibited under the regulation 6 of 2007, ef-
fectively the central government has converted index
control to an equipment control. Some local governments
also administer TPPs like this way in the practice. How-
ever, the equipment control is also invalid because su-
pervision bodies can’t supervise all of the processes of
project construction. Even if they can supervise all of the
processes, they definitely need some specialists, who h av e
to be prevented from buying off, to carry it out.
4. State-Owned Firms Strictly Following
Regulations Are Wasting Energy
In this section, we will discuss how a firm selects the
TPP construction proposal under the above regulations,
based on data from four sample firms.1
In order to observe the influence of regulation on firm
behavior, we classify our sample firms into two groups.
One group is state-owned firms whose mechanism is
more rigid, including Firm A and Firm B, which follow
the regulations strictly; and the other is private firms
whose mechanism is more flexible, including Firm C and
Firm D, which might contravene the regulations for prof it
maximization.
Firm A is a large state-owned firm whose main prod-
ucts are Synthetic ammonia, urea, chlorine-alkali, and
methanol. Firm A’s pow er is supplied by the local power
supply bureau: the subsidy power price for chemical fer-
tilizer use is RMB ￥0.26 per kilowatt-hour (kwh), and
the price for other uses is RMB ￥0.46 per kwh. Che mi cal
production needs some medium-pressur e steam to d ri ve the
turbine, therefore Firm A built a medium-pressure boiler.
However it also needs microtherm and low pressure
steam, and hopes to build a Back Pressure Steam Turbine
to more efficiently use energy to produce power, but this
project is required to be ratified by the government. Con-
sidering the difficulty of ratification, Firm A had to con-
struct a Desuperheater and Decompressor for ensuring
smooth operation. However, this process results in en-
ergy waste of about 32,400,000 kwh electric power an-
nually (if 7200 hours yearly), which amounts to 11,700
tons standard coal. (See Table 3) If there was no gov-
ernment regulation, Firm A would choose the method of
cogeneration of heat and power to build a Back Pressure
Steam Turbine to produce electricity and save money.
Firm B is a large state-owned heat supplier, and sup-
plies low-pressure steam to the market. Because Firm B
1To protect these firms’business secrets, we name these four firms A,
B, C, and D respectively. Without particular statement, the technical
and economic data are all from feasibility study reports or practical
design materials of X Engineering Design Co., Ltd. The data’s utiliza-
tion has been granted by this company. Special declaration: the data is
only for academic discussion and without any business purpose.

H. B. LI, R. H. JU
484
is a large steam supplier, its best operation mode is to
build a TPP of cogeneration. In 2007, Firm B had pl an ned
to build a TPP, but the proj ect still hasn’t be en ratified by
the government, and it has to continue to supply steam by
means of Desuperheater and Decompressor and waste a
large quantity of energy. Table 4 shows the steam cost
and standard coal consumption of the current production
mode, and those of cogeneration calculated in a feasibil-
ity study report. Compared with the ind ices of feasibility
study report, the current mode of Desuperheater and De-
compressor consumes an additional 52,600 tons standard
coal per year, provided the price of per ton standard coal
is RMB ￥450, Firm B loses RMB ￥23,657,000 profit
annually.2
Firm C is a large private coal firm. In the process of
coal production, it produces a large quantity of byprod-
ucts such as coal gangue, coal slurry, coal gas, and so on,
which can’t be sold and pollute the environment. There-
fore, in 2003 Firm C decided to build a TPP to burn out
these wastes and increase power supply at the same time.
Obviously, it is impossible for Firm C to meet the re-
quirement. However, it is necessary and favorable to
implement this project for Firm C, although the govern-
ment requirements are breached. As a result, it invested
RMB ￥96,000,000 to build 3 boilers of 75 t/h and 2
generators of 12 MW without governmental approval.
Because the byproducts, as wastes, were provided to the
TPP free, the cost of electric power is less than RMB
￥0.13 per kwh although the thermal efficiency of small
plant is very low. Given 7200 hours per year, compared
with the normal price of RMB ￥0.46 in the market,
Firm C could save RMB ￥42,800,00 0 power expen ses.3
The huge economic benefit drove Firm C to set up
another 2 × 25 MW generator in 2006 and put it into
production, still withou t governmental approval.
Table 3. Firm A’s energy waste comparing to cogeneration
of heat and electricity.
Electricity loss (kwh) Equals to standard coal waste (ton)
32,400,000 11,700
Data source: the feasibility study report of X Engineering Design Co., Ltd.
Table 4. Firm B’s current index and those in feasibility
study report.
Index Cost of steam
（RMB/ton）
Standard coal
consumption of stea m
(ton/ton)
Desuperheater and
Decompressor 81.74 0.17
Cogeneration of heat
and electricity 63.75 0.13
Data source: the feasibility study report of X Engineering Design Co., Ltd.
Firm D is a large private firm, constructed on the Gobi
in 2003, and put into production in 2005, whose main
products are Coke and methanol. After two years of ope-
ration, the owner found that there is huge energy waste as
the medium-pressure stea m transformed into low -pr essu re
steam by means of Desuperheater and Decompressor. If a
Condense Turbine with Extraction Steam was added, the
waste steam would generate power 12,000 kw in winter
and 9000 kw in summer, and increase power production
by 84,000,000 kw per year. Firm D finally built Cond-
ense Turbine with Extraction Steam, which is written as
Back Pressure Steam Turbine in the application materials
for the ratification convenience. According to the local
coal price, the cost of power production is only RMB
￥0.2 per kwh, much less than the price of power grid,
RMB ￥0.49.
The above cases provide the ideal contrast of two dif-
ferent regulation circumstances. Firm A and Firm B, who
are state-owned, strictly follow the regulations. In this
regulation circumstance, Firms can’t realize the efficient
use of energy and capital. However the private firms,
such as Firm C and Firm D, are more able to follow the
principle of profit maximization and dare to breach the
regulation policy. In this deregulation circumstance, Firms
can realize the efficient use of energy and capital.
5. Regulation and Employment Opportunity
Loss
Other than wasting energy, the TPP regulation also resu lts
in employment opportunity loss.
To be useful, labor should be combined with material
resources (collectively referred to as capital) to get pay ment.
Regulation prevents labor, which should happen without
regulation, from happening. We make the following pro-
position:
TPP regulation results in employment opportuni ty loss.
In order to prove this proposition, we make the following
assumptions:
1) There are only two factors of production: capital
and labor;
2) Firm’s production function is fixed-ratio: f (l, k) =
min {l, k}, where l is the labor that the firm employs, and
k is the capital that the firm invests.
Figure 1 represents the fixed-ratio production function.
For state-owned Firm A or Firm B in the above cases, the
combination of capital K1 and labor L1 will produce
production Q1, the combination of capital K2 and labor L2
will produce production Q2. Now the firm such as A or B
possesses capital K3, and their production quantity only
reaches Q1. However if there is no regulation, these firms
can add capital K3K2, and they will employ additional
labor L1L2 to produce production Q2. Due to regulation,
new TPP can’t be ratified, and capital K3K2 can’t be
invested. This results in a part of capital, which equals to
2Yearly Steam Supply Quantity is taken as 1,315,000 Tons.
3RMB ￥42,800,000 = 24, 00 0 × 0.75 × 7200 × (0.46 - 0.13)/10,000.

H. B. LI, R. H. JU 485
K
3
K
1
L
1
L
2
l
K
2
Q
2
Q
1
k
Figure 1. Employment opportunity loss resulting from TPP
regulation.
K1K3, left unused, which can’t combine with additional
labor L1L2. Therefore, its production quantity can’t reach
Q2, but only Q1, and the employment opportunity loss
resulting from regulation is L1L2. For private Firm C or D
in above cases, nevertheless, they have enough incentive
to breach the regulation to pursue profit maximization
and invest additional capital to build new TPP to employ
more labor and get more production quantity Q2.
State-owned firms obey governmental regulation poli cy
strictly. However, tight regulation prevents labor, which
should happen without regulation, from happening, re-
sulting in employment opportunity loss. For the group of
non-state firms, they have enough incentive to violate
regulations to maximize their profit, and their less mar-
ginal capital combines with mo re labor.
In the same way, we can expand our conclusion. If there
is regulation in one industry, employment opportunity
loss will occur. Because new capital can’t enter this in-
dustry, the labor, which should be combined with the
new capital, can’t happen. Peoples and Talley [8] tests
the hypothesis th at ocean transportatio n deregu lation pr e-
sents owner-operators with greater job opportunities and
the opportunity to increase earnings at port cities and find
that, compared to the pre-deregulation period, a greater
share of owner-operator drivers are employed at port
cities in the shipping post-deregulation period. Anti-
competitive business regulations, like price controls and
administrative obstacles to start a new business also
appear to lower labor force participation and employment
rates [9]. Ebell and Haefke [10] find that a decrease of les s
than two-tenths of a percentage point of unemployment
rates can be attributed to product market deregulation.
We can express the relationship between regulation
and employment opportunity as Figure 2. For example,
if there is a low level of regulation, R1, in one economic
entity C1, then there would be more employment oppor-
tunities, E1, in C1; on the con trary, if there is a high level
of regulation, R2, in another economic entity C2, then
there would be less employment opportunities, E2 in C2.
Consequently, E1E2 is the employment opportunity loss
of economic entity C1 resulting from regulation, com-
pared with economic entity C2. Cardullo [11] studied th e
effects of product and labor market deregulation on wage
inequality and welfare, and showed that deregulation of
goods market has mixed effects on inequality: the wage
variance and the Gini ind ex are lower, bu t the ratio of th e
highest over the lowest wage paid in the economy in-
creases.
6. Conclusions and Discussion
Is the TPP regulation helpful for the development of this
industry? It’s not. Regulation results in energy waste and
employment opportunity loss.
On one hand, in China, regulation is almost ever yw her e
in the economy. It spreads in many industries, such as the
power, petroleum, telecom, railway, finance, healthcare,
designing, installation, civil engineering, trade and secu rit y
sectors, etc, too numerous to mention. On the other hand,
the contrast of payments between ordinary sectors and
regulated sectors is distinct. The income of the majority
of the population is very low, but the income of employ-
ees in regulated industries is high.
Therefore, the conclusion of this paper has distinct
policy implications. If the gov ernment can deregulate the
regulated sectors, more labor can be combined by the
new capital of entrants, the income distribution will be
more equitable, and the welfare of consumers will be
improved.
R2
R1
C2
C1
O Regulation
P
E1
ayment
E2
Payment func ti on
Figure 2. Relationship between the employment and regula-
tion.

H. B. LI, R. H. JU
486
7. Acknowledgements
The authors would like to thank Dr. Lingyun He from
College of Economics and Management of China Agri-
cultural University, and Dr. Sarah Boswell, an alumnus
of University of Wisconsin-Madison for their insightful
comments and constructive suggestions. All errors are
the authors’ sole responsibility. We also thank the Fun-
damental Research Funds for the Central Universities
for the financial support.
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