Description

This paper investigates the impacts of power rationing on firm performance during heat-induced power shortages and the economic rationales for the government’s power rationing strategy in a system characterized by a lack of market mechanisms and price signals. We combine panel data from Chinese firms with fine-scale meteorological data to find robust evidence that high temperatures significantly reduce firms’ electricity usage and performance. Leveraging inter-provincial hydropower dispatching and precipitation anomalies, we provide causal evidence that the decline in firms’ electricity usage is primarily driven by power rationing during high-temperature days. We further developed a framework to theoretically and quantitatively analyze the social planner’s optimal allocation of electricity between sectors and the welfare implications of prioritizing the household sector’s power demand. Our results provide insights that climate change-intensified inter-sectoral competition for electricity and market inefficiencies can explain power rationing in China.