Capacity market
A mechanism that pays resources for being available to supply power or reduce demand at times of system stress, alongside payments for energy.
A capacity market pays generators, storage and demand-side resources for firm capacity (MW) rather than energy (MWh). It aims to ensure resource adequacy where energy-only prices may not provide enough revenue to cover the fixed costs of plants that run rarely, the so-called missing money problem.
Typically the system operator forecasts peak demand plus a reserve margin, then holds a central auction several years ahead. Each resource is derated by its capacity credit: in Great Britain, for example, 4-hour batteries are derated to about 60 to 65%, onshore wind under 10%, and CCGT around 90%. Successful bidders must be available during stress events or face penalties.
Examples:
- PJM (US): the Reliability Pricing Model 2025/26 auction cleared at 269.92 USD/MW-day, nearly nine times the prior year, due to retirements and data-centre demand growth.
- Great Britain: the T-4 auction for 2028/29 cleared at 65 GBP/kW-year.
- Italy, Poland, Ireland, France and Belgium operate similar schemes approved under EU state-aid rules.
Critics argue capacity markets can over-procure and entrench fossil plants; ERCOT (Texas) instead relies on scarcity pricing up to a 5,000 USD/MWh cap.
Related terms
All terms →- Reserve margin
The amount by which available or accredited capacity exceeds forecast peak demand, expressed as a percentage of peak.
- Capacity credit
The fraction of a resource’s nameplate capacity that can be counted on to meet peak demand, used in adequacy planning and capacity markets.
- Peak load
The highest electricity demand recorded on a grid during a given period, which sets the capacity the system must be able to supply.
- Demand response
Changes in electricity consumption by end users, in response to price signals or operator requests, to balance the grid.
- Dispatchable generation
Generation whose output can be scheduled, raised or lowered on request by the operator, independently of weather.
- Contract for Difference (CfD)
A support scheme or contract in which a generator receives the difference between a fixed strike price and a market reference price, paying back when prices exceed it.