Strategic withholding in descending clock capacity auctions: A stage-by-stage analysis of the British electricity capacity market

Capacity markets are increasingly used to secure electricity-system reliability, but their auction designs raise persistent concerns about market power. This paper examines strategic capacity withholding in the British Capacity Market, which procures future capacity through a three-stage process: pre-qualification, disclosure of aggregate qualified supply, and a descending-clock auction with a uniform clearing price. We develop a formal model in which a small number of large portfolio bidders interact with a competitive fringe of uncertain size. The central result is that the same auction rule generates different observable forms of market power depending on bidders’ information about fringe supply: under full information, strategic bidders withhold capacity ex ante by limiting entry at pre-qualification, with no subsequent withdrawal; under imperfect information, capacity may instead be withdrawn after disclosure or during the clock auction as bidders update beliefs about market tightness. The absence of visible in-auction withdrawal is therefore consistent with maximal strategic withholding rather than competitive behaviour. We further derive a closed-form threshold for the per-unit cost of withdrawal: withholding remains profitable even under substantial institutional frictions, and the threshold rises with portfolio size and with the spread between clearing prices in tight and loose market conditions, so strategic withholding is strongest precisely when reliability conditions are most stressed. We relate the framework to recent GB auction outcomes and develop a stage-specific policy taxonomy, highlighting the role of contestability-enhancing reforms alongside direct auction mitigation.