Generation failures, strategic withholding, and capacity payments in the Turkish electricity market

Tunç Durmaz, Sevil Acar and Simay Kızılkaya

Energy Policy, 2024, vol. 184, issue C

Abstract: Since the deregulation of significant parts of electricity markets in many countries worldwide, a generally pronounced matter is that firms strategically lower their generating capacity to raise electricity prices. This paper investigates whether strategic capacity withholding exists in the form of generation failures in the Turkish day-ahead market and whether the capacity remuneration mechanism contributes to the failure durations. The empirical results show strong support for strategic capacity withholding in the Turkish market, and the capacity mechanism adds to the duration of these failures. To the best of our knowledge, this is the first study to investigate capacity withholding considering centrally determined capacity prices and to focus on failure durations and the potential amount of power generation losses they cause. Our analysis conveys core messages for policymakers. A random verification mechanism may be implemented to verify that the failures are purely technical and apply penalties for nonperformance. Second, the Turkish capacity mechanism needs to be restructured to make it more compatible with performance incentives. Our analysis, while focused on the Turkish market, provides insights into the prevalent challenges and potential solutions tied to strategic capacity withholding in deregulated electricity markets globally, notably those employing capacity remuneration mechanisms.

Keywords: Market power; Capacity withholding; Production failures; Capacity mechanism; Moral hazard (search for similar items in EconPapers)
JEL-codes: L12 L94 M21 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:enepol:v:184:y:2024:i:c:s0301421523004822

DOI: 10.1016/j.enpol.2023.113897

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