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Can Producers Apply a Capacity Cutting Strategy to Increase Prices? The Case of the England and Wales Electricity Market

Sherzod Tashpulatov () and Lubomir Lizal

CERGE-EI Working Papers from The Center for Economic Research and Graduate Education - Economics Institute, Prague

Abstract: Promoting competition among electricity producers is primarily targeted at ensuring low electricity prices for consumers. Producers could, however, withhold part of production facilities (i.e., apply a capacity cutting strategy) and thereby push more expensive production facilities to satisfy demand for electricity. This behavior could eventually lead to a higher price determined through a uniform price auction. In this paper, using the case of the England and Wales wholesale electricity market, we empirically examine whether producers can indeed apply a capacity cutting strategy. We analyze the bidding behavior of producers during high- and low-demand trading periods across trading days and find direct and indirect evidence for producers' successful manipulation of capacity bids targeted at increasing a wholesale electricity price. We also examine whether the regulatory reforms to improve competition were successful at mitigating the extent of strategic capacity manipulation.

Keywords: capacity bids; electricity prices; uniform price auction; regulation (search for similar items in EconPapers)
JEL-codes: D22 D44 L50 L94 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com, nep-ene and nep-hme
Date: 2012-07
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