Understanding the Relation between Wind Power Output and Strategic Withholding through Production Failures: Evidence from Diversified Producers in Sweden

Sammanfattning: Previous research provide partial evidence for electricity producers utilizing production failures to disguise the strategic withholding of capacity as well as evidence of diversified electricity producers counteracting the price-reducing effect of the merit order through capacity withholding. In this study, we investigate whether an increased supply of wind power affects the number of reported unplanned production failures among diversified producers in Sweden, thus suggesting this being one of the specific mechanisms with which producers counteract the merit order effect. We use a unique set of local wind speed, plant capacity, and market data to construct variables estimating producer-specific and market total wind power output. With a 2SLS-model, we then examine the effect of wind power on the count of dispatched Urgent Market Messages announcing an unplanned production failure. Our results suggest that a producer's own wind power production has a significant positive effect on the number of reported production failures, while the wind power production of the market has a significant negative effect on the same number. Our results add to the understanding of supply-side strategic behavior in the energy markets.