Tacit Collusion and Capacity Withholding: Reliability Assessment of a Double Price Cap Electricity Market

Increasing overall liberalization and improving reliability indexes are the two prime but often conflicting objectives of electricity markets. Proper embedding of regulatory intervention of price caps provides an effective means to tradeoff between these two objectives. Surprisingly، in the context of the infinitely repeated game paradigm، as in the case of actual electricity markets، the dominance of tacit collusion and capacity withholding highlights the role of non-pivotal firms in frustrating price caps and deteriorating reliability indexes. An agent-based simulation framework is proposed to evaluate both individual behavior of non-pivotal firms within the market and the emergent collusive behavior arising from interaction between firms. Mathematically speaking، to put the capacity withholding into action، we propose embedding a hybrid-control problem in the supply function equilibrium (SFE) modeling assumptions. As a consequence، non-pivotal firms are granted supply curves with vertical segments that obviate the slope constraint of the SFE modeling. A simulation using the generation portfolio of the Iranian electricity industry illuminates the impacts of tacit collusion on reliability indexes.