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A capacity market is a mechanism used by some electricity and energy markets to ensure there is enough available generation capacity to meet future electricity demand. Unlike energy markets, which focus on real-time electricity transactions, capacity markets ensure that sufficient resources are in place to handle future demand surges and maintain grid reliability.Â
In this blog post, we’ll explain how capacity markets work, why they’re crucial for ensuring grid reliability, and how they differ from energy markets. You’ll learn about their key features, how they incentivize resource adequacy, and why they’re increasingly important in today’s renewable energy landscape. We’ll also provide real-world examples of capacity markets in U.S. regions like PJM, ISO New England, and CAISO.
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How do capacity markets work?
In a capacity market, electricity providers participate in auctions where they commit to being available to supply electricity in the future. These auctions are typically held years in advance to allow providers to prepare. Capacity markets ensure resource adequacy — having enough resources to meet forecasted peak demand plus a reserve margin for unexpected fluctuations.
When a provider wins a capacity auction, they agree to provide a specific amount of electricity capacity during the designated period. This forward commitment helps grid operators maintain reliability and prevent supply shortages.
Key features of capacity markets
- Forward commitment: Capacity markets require resources to commit to future availability, typically secured years in advance
- Resource adequacy: The primary goal is to ensure sufficient capacity is available to meet peak demand
- Diverse resource participation: Different types of resources, such as power plants, renewable energy, demand response, and storage, can participate
- Locational pricing: Some capacity markets use locational pricing to reflect supply and demand variations in different regions, incentivizing local reliability Â
Why are capacity markets important in electricity?
Capacity markets in electricity are essential in ensuring electricity supply during high-demand periods, preventing grid failures and blackouts. They offer financial incentives to electricity providers not only to generate electricity but to maintain availability when demand spikes. As more intermittent renewable resources, like solar and wind, are integrated into the grid, capacity markets play a crucial role in ensuring stability.
Examples of capacity markets in the U.S.
Several U.S. regions operate capacity markets to maintain resource adequacy and grid stability:Â
- PJM Interconnection: Operates the largest capacity market in the U.S. with its Reliability Pricing Model (RPM)
- ISO New England: Runs the Forward Capacity Market (FCM) to secure capacity commitments three years in advance
- NYISO (New York): Ensures sufficient resources for peak demand
- MISO (Midcontinent ISO): Uses the Planning Resource Auction (PRA) to secure capacity commitments
- CAISO (California ISO): Manages its capacity needs through the Resource Adequacy (RA) program
How capacity markets support grid reliability in a renewable energy era
Capacity markets are becoming increasingly important as renewable energy sources, such as wind and solar, are integrated into the electricity grid. Because these renewable resources are intermittent, capacity markets ensure there are sufficient backup resources to stabilize the grid during periods when renewable generation dips.
By offering financial compensation to resources that can provide backup capacity, capacity markets help integrate more renewable energy while maintaining grid stability. This is especially critical in regions like California, where renewable energy plays a significant role, and grid reliability depends on well-functioning capacity markets.
Why capacity markets are essential for the future of energy
Capacity markets help ensure there are sufficient resources available to meet future electricity demand, even during periods of peak usage. By compensating providers for maintaining capacity, these markets help safeguard the reliability of the grid, particularly as more renewable energy sources are deployed.
Optimize Your Capacity Market Participation with PCI Energy Solutions
PCI Energy Solutions provides advanced tools to help you maximize your participation in capacity markets, ensuring resource adequacy, efficient planning, and seamless integration with market settlements. Contact us to learn more.Â
