Securing power, compromising climate: Evidence from drought shocks in China

This paper examines how natural disasters complicate government efforts to balance energy security with the energy transition in regulated electricity systems. Using random variations in runoff as a natural experiment, we find that droughts lead to a long-term expansion of coal-fired power capacity. This expansion is reflected in extensive-margin adjustments, particularly through the commissioning of new coal-fired power plants. We also show that, under administrative regulation of electricity trading and generation, this investment response is driven primarily by government efforts to strengthen power supply stability rather than by firms’ profit-seeking incentives alone. Our findings highlight how adaptive responses to climate-related supply shocks can generate long-lasting fossil-fuel legacies in developing countries where electricity markets are not yet fully developed.