Do producers apply a capacity cutting strategy to increase prices? The case of the England and Wales electricity market

Promoting competition among electricity producers is primarily targeted at ensuring fair 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 lead to a higher price determined through a uniform price auction. Using the case of the England and Wales wholesale electricity market we empirically analyze whether producers indeed did apply a capacity cutting strategy. For this purpose we examine the bidding behavior of producers during high- and low-demand trading periods within a trading day. We find statistical evidence for the presence of capacity cutting by several producers, which is consistent with the regulatory authority's reports. •Capacity bidding during high- and low-demand periods is considered•Firstly, producers decide on the bidding strategy: competitive vs. noncompetitive•Secondly, producers decide on the extent of a capacity change•Capacity cutting is examined using Heckman's two-step procedure•There is statistical evidence that producers apply capacity cutting