What Is a Capacity Market? How Grids Pay to Keep the Lights On

Why capacity markets exist

Electricity must be available at the exact moment it's needed, and the grid must be built for its few highest-demand hours. A peaking plant might run only a few dozen hours a year. Energy market revenue alone may not cover its fixed costs, the so-called "missing money" problem. Capacity markets add a separate revenue stream so enough resources stay available to meet a reliability target.

How a capacity auction works

• Forecast: the grid operator forecasts peak demand for a future delivery year and adds a reserve margin.
• Demand curve: it sets an administrative demand curve that defines how much it is willing to pay for different amounts of capacity.
• Offers: generators, storage, demand response and sometimes imports offer capacity at a price.
• Clearing: the auction clears at a single price, usually expressed in $/MW-day. Every cleared resource receives that price.
• Obligation: cleared resources must be available when called and face penalties if they fail to perform during emergencies.

Resources are usually credited at less than their nameplate rating. Accreditation methods such as ELCC (effective load-carrying capability) estimate how much each resource actually contributes to reliability. Solar, wind, and short-duration storage typically receive lower credit than firm resources.

Where capacity markets operate

• PJM (13 states and DC): the Reliability Pricing Model (RPM) Base Residual Auction. The 2025/26 auction cleared at about $270/MW-day, up from about $29 the year before, largely because of tightening supply and rising data center demand. The 2026/27 auction cleared at a negotiated price cap of about $329/MW-day.
• ISO New England: the Forward Capacity Market.
• NYISO: installed capacity (ICAP) auctions.
• MISO: a Planning Resource Auction, with a seasonal design since 2023.
• Great Britain: a government-run Capacity Market with T-4 and T-1 auctions.

ERCOT (Texas) is the main counterexample. It is an "energy-only" market and relies on very high scarcity prices instead of capacity payments.

The debate

• Supporters: capacity markets give a clear forward signal and pay for reliability transparently.
• Critics: the markets are administratively complex, can over-procure, may favor existing fossil plants, and their prices can spike sharply. Consumers ultimately pay the cost through their bills.
• Reforms: recent changes focus on better accreditation for weather-dependent resources, on storage and demand response, and on how large new loads such as data centers are handled.

Bottom line

Capacity markets are how much of the U.S. and UK pay to make sure enough power will be there on the hottest and coldest days. Their prices have become a key indicator of grid tightness. PJM's recent results are one of the clearest signals that rising electricity demand is now hitting bills.