Lesson 5 of 7

Capacity Markets & Resource Adequacy

7 min read

An energy-only market pays generators only for the megawatt-hours they actually produce. That raises an uncomfortable question: what pays a plant to simply exist, on standby, for the handful of hours a year when the system truly needs it? Capacity markets are one answer.

The "missing money" problem

A power plant that only runs during the rare hours of extreme peak demand — a "peaker" — might only be dispatched for a small fraction of the year. If prices during normal hours only reflect normal supply and demand, that plant may never earn enough from energy sales alone to cover its fixed costs, even though the whole system genuinely needs it available for those rare critical hours. This shortfall is often called the missing money problem, and it's the core justification for a separate capacity market.

Resource adequacy: the underlying goal

Resource adequacy means having enough total generation and demand-response capacity available, system-wide, to reliably meet demand even under stressed conditions — an unusually hot summer, several large plants unexpectedly offline at once, low wind output during a demand peak. System operators typically set an explicit reliability target (commonly expressed as an acceptable number of hours of shortfall per decade) and work backward to determine how much capacity the system needs.

How a capacity market actually works

Capacity obligation

Load-serving entities are required to procure enough capacity, from generators or demand response, to cover their expected peak demand plus a reliability margin.

Capacity auction

Generators bid the price they need to keep a unit available; the auction clears at the price that procures the required total quantity, and every cleared resource is paid that price for the commitment period.

Capacity value / accreditation

Not every megawatt of nameplate capacity counts equally — this directly connects to the capacity value concept from the Renewable Energy track. A solar plant is accredited a smaller fraction of its nameplate capacity than a dispatchable gas plant, because it can't be relied on the same way during every stress period.

Why accreditation is getting harder

As covered in the Renewable Energy track, solar's contribution during a winter evening peak can be zero, and wind's contribution during a heat-dome high-pressure system can be unusually low — both at exactly the moments the system needs capacity most. Capacity markets have had to move from simple nameplate-based accreditation toward more sophisticated methods that estimate a resource's actual expected contribution during the specific hours the system is most likely to be stressed, which is a significantly harder analytical problem than it was in a grid dominated by dispatchable plants.