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Strategy of Capacity Withholding in Electricity Markets

Power Market|Regulation

The term refers to a strategy, where electricity suppliers decide to reduce their own supply in order to increase the price. In a situation where strategic withholding is a profitable strategy to behave, the resulting price for commodity increases. This in its turn allows to collect higher revenues from operating units compensating the loss from the withheld units. This particular strategy creates prices strongly deviating from the economically optimal price level. Nowadays, strategic withholding is even named in the list of causes that can cause an electricity crisis like in California in 2000 and 2001.