Electricity Generation Failures and Capacity Remuneration Mechanism in Turkey

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. First, a verification mechanism should be implemented to verify that the failures are genuine. Second, the Turkish capacity mechanism needs to be restructured to make it more compatible with performance incentives.

Keywords: Market power; capacity withholding, production failures, moral hazard

JEL Classification: L94; L12; M21