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1. Introduction
Since the open and reform policy initiated in 1978, China has managed to maintain rapid economic growth and emerged as the second largest economy in the world. In line with the rapid economic expansion of the past three decades, electricity demand has been growing substantially. Between 1980 and 2009, electricity consumption in China increased from 3,006 TWh to 37,032 TWh, at an annual rate of 8%. Over this period, residential electricity demand grew at a faster rate of 12%. The share of residential consumption over total electricity consumption went up from 3.5% in 1980 to 13.1% in 2009. However, China’s per capita residential electricity consumption is still much lower than that of developed countries, accounting for about one-fifteenth of that of the US and one-seventh of that of Japan [1]. Given the continuing trend in income growth, modernization, and urbanization, growth in residential electricity demand is expected to remain high in China.
In the past, China’s electricity industry has relied on making massive investments and increasing supply to meet the fast growing demand. The installed power capacity increased from 5.7 million kw in 1978 to 900 million kw in 2010. However, as the problems, such as energy security and environmental deterioration, become more and more severe in China, increasing energy supply is becoming more costly. To promote energy conservation and reduce the local pollutants and carbon emissions, the Chinese central government has set the national energy intensity reduction target for two consecutive five-year plans, which are 20% and 16% for the 11th and 12th five-year plans (FYPs), respectively. To reach this goal, some policies must be instigated.
Given the side effects of supply policies, demand policies have been taking increasingly important roles in controlling electricity demand. Price policy, among these tools, has a particular role to play in energy conservation. In a competitive market, a rational agent would optimally reduce energy consumption in response to a higher price. However, China’s energy sector is still heavily regulated by the government. Electricity pricing is completely controlled by the government. As pointed out by Lin and Jiang [1], China’s residential...