Environment and Development Economics (2018), 1–21

doi:10.1017/S1355770X18000098
EDE
RESEARCH ARTICLE

Spatial distribution of coal-fired power plants

in China
Lunyu Xie, Ying Huang and Ping Qin∗
School of Economics, Renmin University of China, Beijing, China
*Corresponding author. Email: [email protected]

(Submitted 10 November 2016; revised 5 November 2017; accepted 3 December 2017)

Abstract
Coal has fueled China’s rapid growth in recent decades, but it also severely pollutes the air
and causes many health issues. The magnitude of the health damage caused by air pollu-
tion depends on the location of emission sources. In this paper, we look into the spatial
distribution of coal-fired power plants, which are the major emission sources in China, and
investigate the determining factors behind the distribution. We find that the driving factors
are economic development and expansion of electricity grid coverage; the latter factor plays
a key role in provinces that are less developed but have abundant coal resources. This sug-
gests a way to reduce health damages caused by air pollution without harming the economy:
attracting coal-fired plants to less populated areas by developing trans-province electricity
trade and grid coverage.

Keywords: Coal-fired power plant; economic geography; electricity price; environmental regulation; factor
endowment; installed power capacity; utilization hours
JEL Classification: Q32; Q41; R32

1. Introduction
Coal-fired power plants contribute significantly to greenhouse gases and local air pollu-
tion (World Bank, 1997; Lopez et al., 2005; International Energy Agency, 2012; Sueyoshi
and Goto, 2015). Although carbon dioxide from different locations contributes to green-
house gases uniformly, the adverse effect of local pollutants on human health (e.g., Chay
and Greenstone, 2003; Neidell, 2004; Currie and Neidell, 2005; Coneus and Spiess, 2012;
Chen et al., 2013; Luechinger, 2014; Tanaka, 2015; Ebenstein et al., 2017) and economic
activities (e.g., Ho and Nielsen, 2007) depends highly on the spatial distribution of emis-
sion sources (Zhou et al., 2006; Greco et al., 2007). This implies that, holding total
emissions unchanged, changing the spatial distribution of coal-fired power plants could
reduce the health damages caused by air pollution. That is, it is possible to reduce the
harm from power plants’ emissions without harming the growth of an economy if a
method can be identified to shift the location of power plants. In light of the fact that
China accounts for half of the world’s coal consumption (BP, 2016) and uses half of

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 2 Lunyu Xie et al.

that coal to generate electricity (International Energy Agency, 2014), this paper investi-
gates the spatial distribution of coal-fired power plants in China and identifies the factors
driving the distribution.
A large literature, both theoretical and empirical, studies the factors that potentially
affect an industry’s location. This literature can be divided into three main categories:
the factor abundance hypothesis, new economic geography, and the pollution haven
hypothesis. (1) The factor abundance hypothesis, pioneered by the Heckscher-Ohlin
(HO) and Heckscher-Ohlin-Vanek (HOV) models, generally finds the importance of
factor endowment in determining a country’s production and export structure as well
as an industry’s location (Bowen et al., 1987; Davis et al., 1997; Romalis, 2004; Ger-
lagh and Mathys, 2011; Michielsen, 2013). (2) New economic geography studies how
economies of scale, transaction costs, and other geographical factors affect the spa-
tial agglomeration of economic activities (Fujita, 1988; Krugman, 1991; Wen, 2004).
Some empirical studies combine the factor endowment hypothesis with new economic
geography to investigate the determinants of firm location in practice (Ellison and
Glaeser, 1999; Midelfart-Knarvik et al., 2000; Crafts and Mulatu, 2005; Gutberlet, 2012).
(3) The pollution haven hypothesis emphasizes the effect of environmental regulation,
among other factors, on industries’ location choices. A large empirical literature tests
the existence of the hypothesis (e.g., Jaffe et al., 1995; Becker and Henderson, 2000;
List and McHone, 2000; Greenstone, 2002; Jeppesen et al., 2002; Kanbur and Zhang,
2005; Taylor, 2005). Although the findings are mixed, the baseline is that stringent
environmental regulation does play a role in the location choices of highly polluting
industries.
Most of the literature mentioned above, however, focuses on developed countries.
Little attention is paid to developing countries and in particular to the site decisions of
coal-fired power plants. In China, electricity generated by coal is above 70 per cent of the
total electricity generation (China Energy Year Book, 2013). Because of the massive use
of coal for electricity generation, many cities in China are experiencing severe air pollu-
tion and policy makers are faced with the difficult task of mitigating air pollution while
supporting economic growth (World Bank, 1997). However, the harm from the pollu-
tion varies across regions with different environmental capacity and population density
(Ho and Nielsen, 2007). Therefore, it is important to look into the spatial distribution of
coal-fired power plants in China and the driving factors behind the distribution.
The location choices of coal-fired power plants in China could differ from those
in developed countries, which are market economies. In China, the electricity prices
received by power firms are set by the central government and vary across provinces,
and the utilization hours of power plants are allocated by the provincial government.
This means that a power plant in China chooses price and potential utilization hours
through location choice, instead of through production behavior, as in a market econ-
omy. Therefore, this paper also contributes to the literature by investigating how an
industry’s spatial distribution is affected by output prices and production quotas that
are set by the government, in contrast to results based on market economies.
In addition, coal-fired power competes with other types of energy generation, espe-
cially with hydro and wind energy in recent years in China. Understanding the location
choice of coal-fired power plants may shed light on the renewable energy layout and
curtailment problems. In China, wind and solar capacities have increased dramatically
in recent years, due to government subsidization. Provinces where both renewable and
coal-fired power capacities have increased dramatically run into the problem of curtail-
ing wind and solar and the decrease in utilization hours for coal-powered plants. To

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 Environment and Development Economics 3

solve this problem, we need to understand the location choices for all types of electricity
generation. This paper studies the location choice of coal-fired power plants as a start.
We first build a dataset of provincial capacity of coal-fired power plants from 1998
to 2011. We then merge the dataset with location-specific characteristics, such as coal
reserves, GDP per capita, population, grid coverage, transportation capacity, electric-
ity price, utilization hour quota, environmental regulation, and other power generation.
With the provincial panel data, we look into the spatial distribution of power plants and
empirically analyze the factors that drive this distribution. We also consider the effects
of interprovincial trade of coal and electricity.
We find that coal-fired power plants generally concentrate in the areas with large
electricity markets. We also find that some provinces with abundant coal reserves had
capacity leaps in recent years; the reason could be the development of the electricity grid.
Furthermore, we find that a power plant reacts to utilization hours, but not to electricity
prices. These findings imply that one way to shift coal-fired plants to areas with abundant
coal resources but less population could be to encourage the construction of a trans-
province electricity grid and the establishment of a trans-province electricity market.
Furthermore, when considering competition from energy markets and coal markets, coal
power plants are less likely to be located in areas with a lot of hydro power or in areas
surrounded by neighbors with high coal or electricity demand. In addition, we do not
find a significant effect of environmental regulation on coal power firms’ location choice.
The remainder of the paper is organized as follows. Section 2 introduces the evolu-
tion of air quality in China and the framework of location decisions for coal-fired power
plants. Section 3 looks into the evolution of power plants’ spatial distribution and graph-
ically investigates potential factors behind the distribution. Section 4 uses econometric
models to formally investigate the correlation between the factors and the installed power
capacity. Section 5 concludes.

2. Background
2.1 Air pollution and power plants in China
Power generation in China relies heavily on coal consumption, which has become one of
the major sources of air pollution in China. From the evolution of the spatial distribution
of coal-fired power plants and air pollution, we observe that the areas with high capacity
of coal power plants are also the areas with low air quality.
Looking into the spatial distribution of coal-fired plants in 1998 and 2011 shown in
figure 1, we find that coal-fired plants were concentrated in the coastal areas in 1998.
The capacity in Guangdong was more than 15 gigawatts (GW), followed by Shandong
and Jiangsu, each with capacity over 10 GW. By contrast, the capacity in most central
and northwestern provinces was less than 5 GW. Capacity grew significantly during the
period from 2008 to 2011 for all provinces, except for Tibet and Qinghai. In 2011, coal-
fired power plants were still concentrated in coastal areas, where the average capacity
was above 40 GW. Large growth in capacity was also seen in some inland regions such
as Inner Mongolia, Shanxi and Henan, which are all abundant in coal. Their capacities
in 2011 were more than 40 GW, the same magnitude as coastal areas in the same year.
PM2.5 and SO2 are among the major emissions from coal combustion. NOx emitted
from coal combustion also contributes to the formation of secondary particulate matter.
Looking into the average concentration of PM2.5 and SO2 of each province in 2000 and
2010 (see the four panels in figure A1 in the online appendix), we find that the PM2.5
concentration substantially increased over the ten years, with an increase from 42 ug/m3

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 4 Lunyu Xie et al.

Figure 1. Gross installed capacity of coal-fired plants at province level in 1998 and 2011.
Notes: Data are from the Compilation of Statistical Materials of the Electric Power Industry (1998–2011), which
includes coal-fired power plants with capacity above 6000 kilowatts (KW).

in 2000 to 65 ug/m3 in 2010 on average. Most of the areas which experienced large growth
in power capacity also suffered from deteriorating air quality. For example, the coastal
areas, including Shanghai, Jiangsu and Zhejiang, all experienced large increases in PM2.5
concentration during this period, an average increase of 65 per cent over 2000; the Jing-
Jin-Ji region (including Beijing, Tianjin and Hebei) has the highest PM2.5 concentration

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 Environment and Development Economics 5

level, higher than 100 ug/m3 in 2010 on average, which is almost 10 times the WHO air
quality standard of 10 ug/m3 . A similar pattern can be found for SO2 as well; the Jing-
Jin-Ji region and the coastal area had the highest concentration of SO2 in 2000 and the
largest increase in SO2 in the period 2000–2010.
The most obvious exception is Inner Mongolia, which experienced a large increase in
coal power capacity, while air pollution at the province level remained low. The possible
explanations include that, given the large area of this province, the intensity of power
capacity is low; given the relatively low level of its economic development, the envi-
ronmental capacity in Inner Mongolia is large. This suggests that shifting coal power
capacity to those areas may be a way to reduce the harm of air pollution. But what poli-
cies or measures can attract coal power plants to those areas? In this paper, we analyze the
location choice of coal power plants and the driving factors behind the location choice.

2.2 Location choice of coal-fired power plants

In 2002, China adopted a power industry reform with the purpose of encouraging the
construction of power plants to alleviate the shortage of power supply. Before the reform,
power generation, dispatch, transmission and sales were integrated. They were planned
by the central government and executed by the Ministry of State Electric Power Indus-
try before 1998 and the State Power Corporation between 1998 and 2003. The 2002
reform separated power generation from power dispatch, transmission and sales. The
State Power Corporation was divided into the State Grid Corporation and the Southern
Grid Corporation and generation firms were formed. Since then, the location choices of
plants have been made by the generation firms. Meanwhile the government set electricity
prices, which vary across provinces and are adjusted by the government annually. The
government also allocates utilization hours across plants every year.1 Therefore, resource
endowment, market factors, and political factors all could have played a role in shaping
the spatial distribution of power plants in China.
A location choice can affect a power plant’s expected profit by affecting production
costs. Transportation cost is one of the main costs. According to a report by the China
Logistics Information Center, in 2011, about 60 per cent of coal consumed in China was
transported by rail, and, in some provinces, the transportation cost for coal amounted
to about 40 per cent of the retail price of coal. To save transportation costs, a firm may
choose to build a plant close to coal resources. Besides transportation costs, transmission
costs also could be high in some cases. In areas where grid coverage is low, connect-
ing a large-capacity power generator to a grid usually involves extension or upgrade of
the grid, which could be very costly in time and money. To be connected to the grid, a
firm needs to apply to the power grid company, which owns the grid in this area. Then,

1 The government also has the right to approve a firm’s investments. Before 2004, a successful applica-

tion needed go through examination and approval by the Development and Reform Commissions (DRCs)
at various levels: local, provincial and national. Before the application reached the provincial DRC, the appli-
cation needed to get a ‘‘pass’’ from the higher levels, which usually took more than two years to obtain. The
DRCs not only examined the social impacts of the investment, but also analyzed the profitability of the
investment. After 2004, the application procedure was dramatically simplified. A pass is not needed and
the examination on profitability is given back to the applicants. This change in application procedure could
accelerate the development of the power section as a whole, as well as shifting the location patterns of coal-
fired plants. However, we are not able to estimate the magnitude of the impact by regressions, because the
sample to support the full specification only covers the years from 2004 through 2011, which is after the
change in the approval process.

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 6 Lunyu Xie et al.

the firm either waits for the power line to be built by the grid company or builds the
line by itself, in which case the grid company provides design diagrams, approves the
construction before acceptance, and purchases back the line. The first case involves a
large time cost. In the second case, a firm may need a loan and therefore may face a
liquidity constraint or a large amount of interest before the purchase back; even with-
out a loan, there is forgone interest as an opportunity cost. To avoid such costs, a firm
may want to build a plant where the grid coverage is more extensive. In sum, as pro-
posed by the factor abundance hypothesis and new economic geography, a firm builds
a plant in an area with abundant coal to save on transportation costs or in an area close
to market to save on transmission costs. The firm must make tradeoffs if the two areas
do not coincide, which is the case in China (see the two panels in figure A2 in the online
appendix).
A location choice can also affect a power plant’s profit by affecting electricity price and
quantity of production, i.e., utilization hours. In China, electricity prices are set by the
government, under rules that have been evolving. Before 2004, the operation period price
policy set the electricity price for each power plant, with the aim of securing a certain
investment return rate. Therefore, plants with different construction costs had different
prices. After 2004, a benchmark price policy replaced the operation period price policy
and set electricity prices based on the average construction cost of all plants in the same
province. Since then, the electricity prices received by plants have varied at the province
level, rather than the plant level. The utilization hours are allocated by the provincial
government, involving the following steps: the power plant files an application, the local
grid company adjusts hours based on safety and dispatch capability, and the local gov-
ernment approves the hours. Before 2006, the allocation rule essentially was to divide
hours equally across plants. In 2007, the State Council issued the ‘Announcement of
Energy Saving Generation Dispatch’ to give generation priority to those plants that are
more efficient and less polluting. In general, in a province with a higher quota of hours
and fewer firms, each firm is likely to get more hours, compared to a province with a
lower quota or more firms.
Competition from other types of electricity generation affects the utilization hours
that a coal-fired power plant can get, and therefore affects a power plant’s location choice.
In China, coal and hydro are the two major resources for electricity generation. Before
2011, their installed capacities accounted for about 75 per cent and 22 per cent of the
total capacity, respectively. Wind and solar capacities have increased dramatically in
recent years, but they accounted for only 4.35 and 0.20 per cent, respectively, of the
total installed capacity in 2011 (data source: Compilation of Statistical Materials of Elec-
tric Power Industry). Therefore, the competition for utilization hours is largely between
coal-fired power and hydro power in the period studied in this paper. Due to this com-
petition in provinces rich in hydro power resources (e.g., Sichuan province), coal-fired
power capacity tends be smaller, holding other factors constant.
Environmental regulation can have an impact on a coal-fired plant’s location choice
as well, since pollution abatement has costs. To reduce abatement costs, a firm generally
tends to choose areas where the environmental regulations are less stringent. In China,
the environmental regulations on coal-fired power plants are the same across provinces,
but the enforcement of the regulations varies (Dasgupta et al., 2001; Zhang et al., 2010).
In the areas with poor enforcement, polluting firms face a smaller chance of being caught.
That is, in those areas, they pollute at a lower expected cost. However, the areas with poor
enforcement tend to have lower institutional quality, which could lead to other costs,
such as bribery being ‘a must’ to get things done. Therefore, it is ambiguous whether a

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 Environment and Development Economics 7

firm prefers an area with less corruption or an area with less stringent environmental
enforcement.
Finally, neighboring provinces’ coal resources and market size may also affect a coal
plant’s location choice. A firm may prefer a province whose neighboring provinces have
abundant coal, because it means the firm has access to more coal reserves through trade.
However, these provinces also face direct competition from their neighbors. Whether
neighbors’ coal reserves discourage or attract firms depends on which effect dominates.
The same logic applies to the size of the electricity market as well.
In sum, the factors that potentially impact the spatial distribution of coal-fired
power capacity in China include coal endowments, market size factors, electricity prices,
the utilization hour quota, other energy generation, environmental regulation and its
enforcement, and neighboring provinces’ coal reserves and power demand.

3. Data and graphic analysis

In this section, we first look into the spatial distributions of coal-fired power capac-
ity over the years and then investigate the driving factors discussed above. We collect
province-level data from various sources, starting in the 1990s and continuing through
2011. We describe the data in detail below and summarize them in table 1.

3.1 Spatial distribution of power capacity

Data on coal-fired power capacity are collected from the Compilation of Statistical Mate-
rials of the Electric Power Industry (1998–2011), which includes coal-fired power plants
with capacity above 6000 kilowatts (KW).
Figure 2 illustrates the capacity trajectory of each province since 1998. Four features
are observed. First, the capacity in all provinces at least doubled from 1998 to 2011,
although the increase in capacity varies across provinces. Second, all provinces had slow
growth in power capacity before the power industry reform in 2002. Third, with the
reform, the more-developed provinces experienced a greater increase in capacity. The
unbalanced development in capacity further widened the gap between the leaders in both
economic development and power capacity and the other provinces. Last, Inner Mon-
golia, which was less economically developed but has abundant coal, experienced the
most dramatic increase in installed capacity, from 7.7 GW in 1998 to 59.6 GW in 2011,
and became the third largest province in capacity in 2011, slightly less than Jiangsu and
Shandong. These features, observed in figure 2, imply that the power demand due to eco-
nomic growth may have consistently driven the increase in power capacity, while some
other factors, such as coal endowments, may also have played a role.

3.2 Factor endowment

3.2.1 Coal
We proxy a province’s factor endowment by its coal reserve. Data on coal reserves are
collected from the China Statistical Yearbook from 2003 through 2011. Before 2003, only
national coal reserve data are available.
Figure 3 compares the provincial coal reserves and the gross capacity of coal-fired
plants in 2011. The provinces are ordered based on the quantity of coal reserves. Inner
Mongolia and Shanxi are the top two in coal reserves, while they are also among the top
in power capacity in 2011. However, the positive correlation of coal reserves and power

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8
Lunyu Xie et al.
Table 1. Summary statistics
Mean Std. Dev. Min Max Obs Data source
Dependent variable Coal fired power plant installed capacity (GW) 17.716 15.073 0.887 64.800 270 1
Factors
Endowment factors Coal reserve (billion ton) 10.385 21.690 0.000 106.151 270 2
Investment in power grid (billion yuan) 16.320 18.737 0.263 124.482 270 1
Cumulative investment in power grid (billion yuan) 59.387 79.607 0.263 530.751 270 3
Market factors Electricity consumption (billion kwh) 106.144 84.316 5.662 439.902 270 4
GDP per capita (thousand yuan) 24.052 17.535 3.686 101.146 270 2
Population (million) 43.625 26.630 5.338 105.049 270 2
Rail coverage (thousand km) 2.687 1.562 0.200 9.200 270 2
Political factors Electricity price (yuan per thousand kwh) 347.025 65.181 227.000 506.000 240 5
Utilization hours (hour per year) 4941.429 909.889 2059.000 7553.500 268 1
Environment and market Index of institutional quality and legal system environment 5.888 3.294 1.490 19.890 210 6
Hydro (billion cubic meter) 69.088 66.072 0.560 292.100 270 2
Coal reserve of neighbors (billion ton) 60.840 63.217 0.000 218.083 270 7
Demand of the same grid 4050.128 2553.024 412.240 11818.500 270 7
Notes: Data sources: (1) Compilation of Statistical Materials of Electric Power Industry. (2) China Statistical Yearbook, (3) China Statistical Yearbook on Environment. (4) China Energy Statistical
Yearbook. (5) Calculated. Number of observations: 30 provinces (including municipalities directly under the central government and autonomous regions) are included. Lacking data, Hong Kong,
Macao, Taiwan, and Tibet are excluded; years from 1998 through 2011 are covered, except that data before 2003 are not available for coal resources, investment on power grid, water, and variables
calculated from them. (6) The Market Index of China. (7) Calculated from variables above.
 Environment and Development Economics 9

Figure 2. Provincial trajectories of power capacity from 1998 through 2011.

Notes: Data are from the Compilation of Statistical Materials of the Electric Power Industry (1998–2011), which
includes coal-fired power plants with capacity above 6000 kilowatts (KW). The provinces in the legend are ordered
based on their installed capacities in 1998.

capacity is not clear for other provinces. For example, coal reserves in Zhejiang, Guang-
dong, and Shanghai are low, but power capacity is high. Notice that these provinces have
a high level of economic development, and therefore a high demand for power. This sug-
gests that, besides coal endowment, proximity to markets may be another driving force
for the development of coal-fired plants. We will investigate market factors in the next
subsection.
To further investigate the correlation between coal reserves and installed capacity,
using data in all years (2003–2011), we depict the scatter points and fitted lines of coal
reserves and coal-fired power capacity (see panel A in figure A3 in the online appendix).
We find that the slope of the annual fitted lines increases over the years. The slope is 0.048
in 2003 and not statistically significant, while it is as large as 0.41 in 2011 and statistically
significant at the 5 per cent significance level. The reason could be that the provinces

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 10 Lunyu Xie et al.

Figure 3. Coal-fired power capacity and coal reserves at province level in 2011.
Notes: Data are from the China Statistical Yearbook 2011. The provinces are ordered based on their installed
capacities in 2011.

with abundant coal, such as Shaanxi, Inner Mongolia and Shanxi, had more dramatic
increases in power capacity in recent years.

3.2.2 Electricity grid

We have seen from figure 2 that power capacity in the provinces with abundant coal
leaped in recent years. One simultaneous phenomenon is the extension of the power
grid in those areas. To investigate the correlation between grid and capacity, we use
investment in the power grid to proxy the development of the grid. Investment data are
from the China Statistical Yearbook from 2003 through 2011. The statistical standards
are inconsistent before and after 2003. Therefore, the investment data before 2003 are
not used in this study. Investment is defined as the total investments in a year for main-
taining or building the power grid and replacing grid-related equipment. To measure the
grid coverage in a province in a certain year, we accumulate all the investments in the
current year and the previous years. That is, for each year, we use cumulative investment
to proxy the grid coverage, and annual investment to proxy the grid development year.
We depict the scatter points of grid coverage and power capacity (see panel B in figure
A3). As we discussed above, we expect a larger effect of grid development in the areas
with abundant coal but low grid coverage. In the plot, we therefore distinguish the three
provinces with the largest coal reserves, which are Shanxi, Inner Mongolia and Shaanxi.
The slope of the fitted line for the three provinces is much steeper than that for the other
provinces, which confirms the hypothesis.

3.3 Economic geographical factors

3.3.1 Market size
In determining the location of industries, the presence of transaction costs (e.g., high
transmission costs induced by the low coverage of the electricity grid) means that the

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 Environment and Development Economics 11

demand side matters and that geographical factors come into play. In this section, we
focus on the geographical distribution of demand and use the size of the electricity
market to proxy it.
There are different ways to measure the size of the electricity market. Electricity con-
sumption is a direct measurement; GDP per capita reflects the overall level of economic
development, which demands energy; population reflects the size of the potential market.
We collect electricity consumption data from the China Energy Statistical Yearbook, and
obtain GDP and population data from the China Statistical Yearbook. The data show that
there are strong correlations between capacity and electricity consumption (correlation
coefficient = 0.92), capacity and population (correlation = 0.56), and capacity and GDP
per capita (correlation = 0.85). The latter two correlations are weaker, because GDP per
capita and population size work together to determine the electricity demand.

3.3.2 Coal transportation cost

A positive correlation between capacity and market size means that capacity concen-
trates in the areas with larger markets, which are areas far from coal. Therefore, coal
transportation cost comes into play.
We use rail coverage to proxy coal transportation cost, because provinces with exten-
sive rail coverage are expected to have lower transportation costs. We collect yearly
rail mileage data at the province level from the China Statistical Yearbook. The data
show that, as expected, capacity and railway mileage is positively correlated (correlation
coefficient = 0.37).

3.4 Electricity price and utilization hours

3.4.1 Electricity price
Electricity price data are collected from the website of the National Development and
Reform Commission, which adjusts the benchmark price. As shown by the data, the
electricity price varies across provinces, with the highest (over 500 yuan per thousand
kilowatt hours) in Guangdong in 2011, and the lowest (below 250 yuan) in Gansu in all
years. Despite the large variation across provinces, the price trajectories in all provinces
have the same pattern. The price increases gradually every year, with the largest increases
in 2008 and 2011. The only exception is Inner Mongolia, where the price dropped in
2007.
Putting together the electricity price data and the capacity data, we see that power
capacity is positively correlated with benchmark price (correlation coefficient = 0.37),
indicating that areas with higher prices have more power capacity. However, we cannot
yet conclude that capacity reacts to price, because areas with higher prices are also the
areas with larger demand (the correlation between price and GDP per capita is 0.34). We
therefore adopt a regression method in the next section to distinguish the roles of price
and demand.

3.4.2 Utilization hours

Data on firm-level utilization hours are collected from the Compilation of Statistical
Material of the Electric Power Industry from 1995 through 2011, in which 1996, 1999,
and 2001 are missing. All coal-fired power plants with installed capacity of more than
6 MW are included. We use the median of firm-level utilization hours to proxy the
expected production quota. We choose median rather than mean to alleviate the influ-
ence of outliers. The data show that average and median utilization hours are different,

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 12 Lunyu Xie et al.

but the difference remains stable. Utilization hours go up and down over the years and
vary dramatically across provinces. The standard deviation ranges from 742 in 1998
to 1303 in 1995. Most provinces remain above 4000 h for all the years, while Guangxi
remains below 3,000 h for most of the years.
To avoid the problem of reverse causality, in which increases in capacity lead to lower
average utilization, we use utilization hours in the last year (or the year before the last
year if last year’s data are missing) The data show that power capacity and the lagged
utilization hours are slightly correlated (0.07). Whether this correlation indicates that
capacity reacts to utilization hours will be investigated by regressions in the next section.

3.5 Environmental regulation, energy generation competing with coal, and inter-
provincial trade of coal and electricity
In China, environmental regulation of firms is the same across provinces, as long as these
firms are in the same industry. However, the enforcement of the regulations can be very
different. It depends on the institutional quality of the local and provincial governments,
which we measure by the index of institutional quality and legal environment from the
report on the process of marketization in China by Fan et al. (2011). The greater the
index is, the higher the institutional quality is (more information about the index is avail-
able in appendix B of the online appendix). We use this index to proxy the enforcement
of the regulations. If the pollution haven hypothesis holds, we expect to see fewer firms
in the provinces with a higher index. However, the index also reflects the corruption level
of the governments. We expect firms to prefer both looser enforcement of regulations
(lower index value) and a lower corruption level (higher index value). Therefore, the
predicted coefficient of the index is ambiguous. It depends on which of the two opposite
effects dominates. As we will see below, the two effects tend to cancel out.
To measure the competition from hydro power, we collect data on the hydro
resources of each province, from the China Statistical Yearbooks. The data show that
coal-fired power capacity and hydro resources are negatively correlated, implying
that areas with more hydro tend to have less coal-fired power capacity. We are also aware
that in China, areas with more hydro are usually the areas that are less developed or have
less coal, such as Sichuan, Yunnan, Guizhou, Guangxi, etc. Therefore, we employ a mul-
tiple linear regression in the next section to disentangle the effects of market demand,
coal resource and hydro resource.
To show the effect of trade, we define a variable of neighbors’ coal reserve to proxy
potential coal trade, and a variable of market size of provinces sharing the same area
grid to proxy potential power trade. We use neighbor’s coal reserve, instead of traded
coal quantity of each province pair, because coal trade is a result of, not a cause of, a
coal power firm’s location choice. For power trade, there are five area grids in China and
most interprovincial trade of electricity is within the area grid. So, we use the sum of
GDPs of all provinces in the same area grid minus the GDP of the province of interest,
to measure the potential market size of neighboring provinces. The data show that coal
power capacity is positively correlated with neighbors’ coal reserves and with market size
of provinces on the same grid.

4. Econometric analysis
In the previous section, we investigated the correlation between capacity and each of
the potential driving factors. In this section, we employ a multiple linear regression to

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 Environment and Development Economics 13
Table 2. Effects of coal endowment and market factors on installed capacity of coal-fired power plants

Dependent variable: installed capacity of coal-fired power plants

(1) (2) (3) (4) (5) (6)
Coal reserve 0.180∗∗∗ 0.215∗∗∗ 0.200∗∗∗
(0.052) (0.051) (0.026)
Investment in power grid 0.193 0.010
(0.172) (0.192)
Cumulative investment in 0.226∗∗∗ 0.079∗∗
power grid (0.057) (0.033)

Investment * Cumulative −0.001∗∗ −0.000

investment (0.001) (0.000)

Power consumption 0.159∗∗∗

(0.015)
GDP per capita 0.284∗∗ 0.344∗∗∗ 0.241∗∗
(0.114) (0.111) (0.095)
Population 0.371∗∗∗ 0.331∗∗∗ 0.269∗∗∗
(0.062) (0.073) (0.065)
Rail coverage 2.411∗ 1.525∗∗
(1.309) (0.661)
Constant 7.650∗∗∗ 5.736∗∗∗ −0.387 −9.656∗∗∗ −14.596∗∗∗ −11.079∗∗∗
(1.828) (1.233) (0.857) (3.063) (3.761) (3.774)
Observations 270 270 270 270 270 270
R2 0.192 0.584 0.824 0.576 0.627 0.755
Notes: Mixed OLS. All specifications have year dummies. Standard errors are clustered at the province level. *, **, ***
represent 10%, 5%, and 1% significance level, respectively.

disentangle the contributions of the factors in shaping the spatial distribution of power
capacity. In all regressions, we include year fixed effects to account for the effects of com-
mon shocks that are not captured by the control variables. We do not include province
fixed effects, because we rely on the provincial variations to identify the effects of factors
that vary across provinces but do not change much across years for the same province
(e.g., coal reserves). That is, we choose ‘between estimator’ over ‘within estimator’ (more
detailed information about the choice between ‘between estimator’ and ‘within estima-
tor’ is available in online appendix C and online appendix table A1). Regression results
are shown in table 2 for endowment and market factors, table 3 for electricity price, and
table 4 for utilization hours.

4.1 Factor endowment

We start with a regression with coal reserves as the only covariate, besides year fixed
effects. As shown in table 2, column 1, the estimated coefficient is 0.18 and statistically
significant; a one standard deviation increase in coal reserve (21.69 billion tons) leads
to a 29 per cent standard deviation increase in capacity (0.18 × 21.69/13.428 = 0.29).
However, the R square shows that only 19 per cent of the variation in capacity can be
explained by the variation in coal reserve and time.

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 14 Lunyu Xie et al.
Table 3. Effects of electricity price on installed capacity of coal fired power plants

Dependent variable: installed capacity of coal fired power plants

(1) (2) (3) (4) (5)
Price 0.072
(0.043)
Price_lag1 0.079∗
(0.044)
Average price over time 0.079∗ 0.077∗ −0.020
(0.044) (0.041) (0.033)
Additional control variables N N N N Y
Observations 210 210 210 240 240
R2 0.133 0.142 0.143 0.174 0.760
Notes: Mixed OLS. All specifications have year dummies and constants. Additional control variables include all the explana-
tory variables in table 2, column (6). Standard errors are clustered at the provincial level. * represents the 10% significance
level. The complete table with all the estimated coefficients listed is available in online appendix table A2.

Table 4. Effects of utilization hours on installed capacity of coal fired power plants

Dependent variable: installed capacity of coal fired power plants

(1) (2) (3)
Hours_lag1 0.000 0.001 0.000
(0.001) (0.001) (0.001)
Hours_lag2 0.001 0.001 0.001
(0.000) (0.001) (0.001)
Hours_lag3 0.001 0.001 0.002∗∗∗
(0.001) (0.001) (0.001)
Average price over time 0.007
(0.037)
Additional control variables N N Y
Observations 420 240 240
R2 0.236 0.108 0.785
Notes: Mixed OLS. All specifications have year dummies and constants. Additional control variables include all the explana-
tory variables in table 2, column (6). Standard errors are clustered at the provincial level. *** represents the 1% significance
level. The complete table with all the estimated coefficients listed is available in online appendix table A3.

As we discussed in the last section, we expect an increase in power capacity when the
electricity grid becomes more developed, especially in the areas with abundant coal but
low grid coverage. We use cumulative investment in the grid to proxy grid coverage, and
current investment to proxy grid development. We therefore expect a positive coefficient
of both current investment and cumulative investment, and a negative coefficient of their
interaction term. The regression results are the same as expected, as shown in table 2,
column 2. The R-squared is 0.584, much larger than that of the first regression. This
suggests that the development of the electricity grid is critical to the development of
power plants.

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 Environment and Development Economics 15

4.2 Economic geographical factors

We add in power consumption, as a proxy of market size, in table 2, column 3. As
expected, the coefficient of power consumption is positive and statistically significant.
However, power consumption is the equilibrium quantity of the market, decided by fac-
tors from both the demand side (namely the potential market size) and the supply side
(namely the capacity of all power plants) simultaneously. We therefore use GDP per
capita and population size, instead, to measure the potential market size in the following
regressions.
As shown in table 2, column 4, the coefficients of both GDP per capita and population
are positive and statistically significant at the one per cent significance level. R-squared is
0.58. These results indicate that market size is an important factor that drives the location
choice for coal-fired plants.
Locating close to markets, however, may result in higher coal transportation costs
because areas with abundant coal are usually far away from areas with a large market.
Greater rail coverage may decrease coal transportation costs, and this lower cost attracts
firms. We therefore expect greater capacity in provinces with greater rail coverage. In
column 5 of table 2, we add in rail coverage and indeed get a positive and statistically
significant estimate of the coefficient of rail coverage.
In column 6 of table 2, we include all the variables that represent factor endow-
ment, market size, and possible constraints (electricity grid and rail coverage) to reflect
their comprehensive effects. Compared to column 3, the effects of coal reserves and
cumulative investment in the power grid remain statistically significant, although their
magnitudes decrease. A possible reason is that annual investment in the power grid is
highly correlated with GDP per capita. As for market size, the effect of per capita GDP,
the effect of population size, and the effect of rail coverage also remain statistically sig-
nificant, although their magnitudes decrease. The R-squared in this regression is much
higher than in the regressions in columns 2 and 5, which separately consider endow-
ment factors and market factors. These results indicate that both factor resources and
market size are important factors in location choices for coal-fired power plants; their
effects, however, are constrained by other factors such as electricity grid coverage and
rail coverage.

4.3 Electricity price

In table 3, we investigate the effect of electricity price on the spatial distribution of
coal-fired plants. First, we regress power capacity on electricity price only – cur-
rent price in column 1, last year’s price in column 2, and average price over time in
column 3. We have 240 price observations (30 provinces in eight years from 2004
through 2011), but only 210 price lag observations, because the first year’s lag price
data are missing. To make the regression results of the three price covariates com-
parable, we also drop the first year data for the regression of current price and that
of average price over time. We find that the estimated coefficients of price variables
are similar. This is expected, because as shown by the price data, the provincial prices
have similar trajectories. So, we are comfortable in picking any of them and we use
average price over time for the rest of the analysis. In column 4 of table 3, we put
back the first year to make use of the full dataset, and the results remain stable. The
coefficient is 0.077 and significant at the 10 per cent significance level. This indi-
cates that the provinces with higher electricity prices do have larger coal-fired plant
capacity.

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 16 Lunyu Xie et al.

Without controlling other variables, however, we can only interpret this result as a
correlation. No matter whether a firm reacts to price or not, a positive correlation will be
seen if the government sets the price higher in the provinces where the market is larger or
the coal is abundant. We therefore add in endowment variables and market size factors in
column 5 (table 3). We find that the estimated coefficient of price becomes much smaller
and not significant. This suggests that the firms do not actually react to the exogenous
and stable electricity prices; they build plants where there is a large market or abundant
coal.

4.4 Production quota

In table 4, we investigate how expected utilization hours affect a firm’s location choice.
We use median utilization hours over all plants in the same province in the last three
years to proxy the expected utilization hours. We use lagged hours to avoid the reverse
causality that a leap in capacity leads to lower average utilization hours, holding demand
constant. We use three lags because it usually takes 18 to 30 months (roughly one to three
years) for a coal-fired power plant to complete the construction and start production.
In column 1 of table 4, we regress capacity on lagged hours only, and we find that
the coefficients are small and not statistically significant. One thousand more utilization
hours (more than one standard deviation more hours) only lead to one gigawatt more
installed capacity (less than ten per cent standard deviation more capacity).
Utilization hours are also correlated with demand and possibly other factors, so we
add into the regression all the factors we discussed earlier. We are aware that adding all
variables will lose sample size. To eliminate the impact of sample size, we restrict the
regression in column 2 to the same sample as column 3, which includes all the vari-
ables. Column 2 shows that sample size has little impact on the estimated coefficients of
hours. Column 3 shows that utilization hours do have some impact on firms’ location
choices – the coefficient of hours in the two years before the last year is statistically signif-
icant. However, the magnitude is not economically significant – one standard deviation
more utilization hours leads to only 14 per cent of a standard deviation more capacity
installation.

4.5 Environmental regulation, hydro generation, and interprovincial trade

In table 5, columns 1 through 3, we investigate how environmental regulation affects the
location choice of coal-fired power plants. In column 1, we replicate the main regression,
which is the same as the one in table 4, column 3. In column 2 of table 5, we add the vari-
able of the index of institutional quality, discussed above. We find that the coefficient
is 0.007. This shows that a one standard deviation increase in the index (3.45) is asso-
ciated with 0.024 GW increase in coal-fired power capacity (calculated as 0.007 × 3.45),
which is about a 0.1 per cent increase. This estimate is neither economically nor statis-
tically significant. It suggests that the corruption effect and pollution haven effect offset
each other. In addition, we notice that the coefficients of other variables change. For
example, the variable of GDP per capita decreases by half and becomes insignificant.
This is due to the change of sample size, resulting from the missing data of the index of
institutional quality variable. In column 3, we run the same regression as in column 1,
using the same sample as in column 2. The results from columns 2 and 3 are similar.
This confirms that it is the sample selection that leads to the change of coefficients and
significance.

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 Environment and Development Economics 17
Table 5. Effects of environmental regulation, hydro generation, and interprovincial trade

Dependent variable: installed capacity of coal fired power plants

(1) (2) (3) (4) (5) (6)
Index of institutional 0.007
quality and legal (1.159)
system environment

Hydro −0.064∗∗∗
(0.022)
Coal reserve of neighbors −0.045∗ −0.048∗
(0.025) (0.024)
Demand of the same grid −0.001∗∗
(0.001)
Hours_lag1 0.000 0.001 0.001 −0.000 0.001 0.001
(0.001) (0.001) (0.001) (0.001) (0.001) (0.001)
Hours_lag2 0.001 −0.000 −0.000 0.000 0.001 0.001∗
(0.001) (0.001) (0.001) (0.001) (0.001) (0.001)
Hours_lag3 0.002∗∗∗ 0.002∗∗∗ 0.002∗∗ 0.001∗ 0.003∗∗∗ 0.003∗∗∗
(0.001) (0.001) (0.001) (0.001) (0.001) (0.001)
Average price over time 0.007 0.005 0.005 0.008 0.002 0.023
(0.037) (0.036) (0.035) (0.029) (0.036) (0.035)
Coal reserve 0.195∗∗∗ 0.163∗∗∗ 0.163∗∗∗ 0.165∗∗∗ 0.209∗∗∗ 0.248∗∗∗
(0.024) (0.026) (0.027) (0.032) (0.026) (0.033)
Investment on power grid −0.048 −0.091 −0.091 0.011 −0.059 −0.080
(0.182) (0.173) (0.174) (0.164) (0.171) (0.174)
Cumulative investment in 0.076∗∗ 0.173∗∗∗ 0.173∗∗∗ 0.114∗∗∗ 0.070∗ 0.072
power grid
(0.035) (0.061) (0.061) (0.034) (0.036) (0.043)
Investment * cumulative −0.000 −0.000 −0.000 −0.000 0.000 −0.000
investment
(0.000) (0.001) (0.001) (0.000) (0.000) (0.000)
GDP per capita 0.228∗ 0.191 0.191 0.102 0.214∗ 0.220∗∗
(0.120) (0.202) (0.113) (0.107) (0.111) (0.103)
Population 0.303∗∗∗ 0.253∗∗ 0.253∗∗ 0.298∗∗∗ 0.325∗∗∗ 0.337∗∗∗
(0.100) (0.101) (0.100) (0.074) (0.090) (0.086)
Rail coverage 1.828∗∗ 1.526∗∗ 1.526∗∗ 1.640∗ 2.661∗∗ 2.082∗∗
(0.797) (0.610) (0.590) (0.944) (0.977) (0.942)
Constant −32.383∗∗ −21.487 −23.011 −15.324 −35.957∗∗ −40.164∗∗∗
(15.556) (14.792) (14.317) (15.371) (15.135) (14.540)
Observations 240 180 180 240 240 240
R2 0.785 0.799 0.799 0.823 0.803 0.815

Notes: Mixed OLS. All specifications have year dummies. Standard errors are clustered at province level. *, **, *** represent
10%, 5%, and 1% significance level, respectively.

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 18 Lunyu Xie et al.

In table 5, column 4, we investigate how hydro power competes with coal power. The
coefficient of surface water is negative and statistically significant. This means that there
are fewer coal power firms in areas with a larger amount of surface water. It implies
competition between hydro and coal-fired power generation. After adding the hydro
variable, the regression results remain stable, except that the coefficient of GDP per
capita decreases by half and is not statistically significant. The possible explanation is that
hydro and GDP per capita are negatively correlated (correlation coefficient = 0.31). In
China, water resources are concentrated in the southwest, such as Sichuan and Yunnan
provinces, while the GDP per capita is relatively low in those areas.
In table 5, columns 5 and 6, we investigate how the interprovincial trade of coal and
electricity affects the location choice of a coal-fired power firm. The regression coeffi-
cients of the neighboring provinces’ coal resources and grid demand are both negatively
and statistically significant. This indicates that the competition effect dominates; coal-
fired power firms are less likely to choose provinces whose neighbors are better off in
terms of coal reserve and market size.

5. Conclusion
In this paper, we investigate the spatial distribution of coal-fired power plants in China
and the potential driving factors, which include coal endowment, market size factors,
electricity prices, utilization hours, environmental regulation, and competition from
other power generation. We also consider the effects of neighboring provinces’ coal
endowment and market size on the location choices of the coal power plants.
We find that, in China, coal-fired power plants are located in the areas where the
demand is greater, especially in the earlier years of our sample. Although these areas
are far from where the coal is, a developed railway system in China ensures that coal
transportation cost is lower than the cost of electricity grid expansion. With the devel-
opment of the electricity grid in areas with abundant coal, power plants started to
locate in coal-rich areas, thus saving transportation costs, now that power transmission
costs are dramatically lowered by the grid expansion. We also find that, when choos-
ing location, firms do not react to electricity prices, which are set by the government,
are stable over the years, and vary across provinces. However, firms do react to pro-
duction quota, i.e., allowable utilization hours. Furthermore, we find that coal-fired
power plants tend to avoid competition from other power generation by investing in
areas with less hydro, and that they are likely to be deterred by neighboring provinces’
coal endowment and power demand. In addition, we do not find that plants react to
different levels of stringency in enforcement of environment regulations; the possible
reason is that stringent environment regulation is accompanied by high institutional
quality.
These findings have important policy implications for reducing the harm caused by
power generation without harming the economy. Air pollution has larger adverse effects
in the areas with large markets, because in those areas population density is high and the
scale of economic activities is large. By contrast, the areas with abundant coal are usu-
ally less developed areas, with lower population density. This implies that one way to
reduce the harm of air pollution is to shift power plants from where the market is to
where the coal is. By identifying the factors driving the choice for location of coal-fired
plants, this paper suggests that such a shift could be induced by lowering the transmis-
sion costs for plants built in the areas abundant in coal and increasing their utilization
hours. The measures to achieve this goal may include encouraging the construction of

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 Environment and Development Economics 19

a trans-province electricity grid and the establishment of a trans-province electricity

market.
Finally, there are some caveats on the environmental implications of the policies men-
tioned above. First, the emissions from coal-fired power generation vary across plants,
mainly because of variation in emission control technologies (He et al., 2015) and the
enforcement of regulations. Thus, to reduce the harm to human health from coal burning
by shifting power plants, it is important to implement the same standard for emis-
sion control technologies and require the same enforcement of regulations throughout
the country. Second, although shifting polluting sources to less populated areas would
reduce the total exposed population and therefore reduce the overall harm to human
health, from the perspective of a province the increase in capacity means both economic
growth and increase in pollutants; the provinces into which the capacity shifts would
be faced with the tradeoff between economic growth and pollution. Therefore, in future
work, it will be important to study the distributional effect of such capacity shifts and to
find the policies needed to enhance economic growth and at the same time alleviate the
harm from pollution.
Supplementary material. The supplementary material for this article can be found at https://doi.org/
10.1017/S1355770X18000098

Acknowledgements. This work is supported by the Beijing Natural Science Foundation (9174037) and
National Natural Science Foundation of China (71703163).

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Cite this article: Xie L, Huang Y, Qin P (2018). Spatial distribution of coal-fired power plants in China.
Environment and Development Economics 1–21. https://doi.org/10.1017/S1355770X18000098

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