Research on Economic Withholding in Wholesale Markets Based on Incremental Heat Rate

Experience with deregulated electricity markets has shown that the exercise of market power is the significant reason that results in market failure. More attention should be paid on economic withholding since it is the main expressive form of exercise of market power. Economic withholding is bidding a relatively high price above marginal cost of their generation units with the expectation of receiving higher revenue. Heat Rate is introduced to establish the linkage between individual suppliers´ bid curves and their own heat rates because heat rate times the fuel price equals the fuel costs. In this paper we assume fuel costs are equal to variable costs since fuel costs occupy the most shares of variable costs. We originally propose that economic withholding is quantified as the area between the bid curve and corresponding fuel costs curve take accounting of its fixed costs. Numerical examples are presented to verify the effectiveness of the proposed method. The approach developed in this paper provides a clearly defined and measurable standard for quantifying the existence and severity of economic withholding in electricity markets