High temperature, power rationing, and firm performance

This paper develops a theoretical framework and provides causal evidence explaining the rationality of government-imposed power rationing strategies during high-temperature periods in electricity systems lacking market mechanisms and price signals. By combining comprehensive panel data on Chinese firms with high-resolution meteorological data, we document robust evidence that high temperatures significantly reduce both electricity usage and operational performance among firms. We then construct supply shocks based on precipitation anomalies weighted by the inter-provincial hydropower dependence to identify power rationing. These analyses demonstrate the persistent prevalence of firm-level power rationing across China in recent years. Furthermore, we show that while redirecting electricity from industrial to residential sectors during heat-induced shortages reduces firm performance, this represents a welfare-maximizing outcome from a social planner's perspective. Our findings reveal how climate change intensifies inter-sectoral electricity competition, with market inefficiencies playing a critical role in explaining China's rationing patterns. • We develop theory of welfare-maximizing electricity rationing during climate shocks. • We identify power rationing via supply shocks based on precipitation anomalies weighted by the inter-provincial hydropower dependence. • We demonstrate the persistent prevalence of firm-level power rationing across China. • Estimates show that residential WTP exceeds industrial losses by 4:1 during shortages.