Generators earn only part of their revenue from selling energy. Capacity markets pay for being available. Ancillary services markets pay for reliability products. This guide explains how these markets work and why they matter for grid reliability.
Three revenue streams
| Revenue | What it pays for |
|---|---|
| Energy | MWh actually generated |
| Capacity | MW of capacity available for reliability |
| Ancillary services | Grid stability products (frequency, voltage, reserves) |
Capacity markets
Capacity markets pay generators for being available to run, even if they do not run much. Ensures adequate reserve margin. Run in PJM, NYISO, ISO New England, and some other markets.
How capacity markets work
- Grid operator forecasts peak demand plus reserve margin.
- Auction held 3 years ahead of delivery year.
- Generators bid capacity they will make available.
- Market clears at price where supply meets demand.
- Generators paid clearing price for capacity.
- Must be available during declared emergency events.
- Penalties for non performance.
Capacity prices
Who participates in capacity markets
- Baseload plants (nuclear, coal, gas combined cycle).
- Peaker plants (gas turbines, RICE).
- Battery storage (increasingly).
- Demand response resources.
- Renewables (varies by market rules; often derated for intermittency).
- Hydro (reservoir and pumped).
Contemporary capacity market issues
Regional differences
| Region | Approach |
|---|---|
| PJM | Formal capacity market (Reliability Pricing Model) |
| NYISO | Installed Capacity market |
| ISO New England | Forward Capacity Market |
| MISO | Planning Resource Auction |
| ERCOT (Texas) | Energy only market (no capacity market) |
| CAISO (California) | Resource Adequacy programme (not fully market based) |
| SPP | Planning Reserve Margin, less formal |
The Texas energy only model
ERCOT does not run a capacity market. Instead relies on very high energy prices during scarcity (up to USD 9,000 per MWh) to incentivise generator availability. Worked reasonably until 2021 winter storm exposed vulnerabilities. Ongoing debate about adding capacity market.
Ancillary services markets
| Service | What it provides |
|---|---|
| Regulation | Second by second frequency control |
| Spinning reserves | Fast response to generator trips |
| Non spinning reserves | Slower response to contingencies |
| Reactive power | Voltage support |
| Black start | Restart after full blackout |
| Fast frequency response | Very fast frequency support (batteries excel) |
| Reliability must run | Bilateral contracts for units needed for local reliability |
Regulation service
Regulation provides real time frequency control by adjusting output up or down every few seconds in response to grid frequency deviations. Batteries excel because of instant response. Growing battery share of regulation revenue in many markets.
Reserves
Spinning reserves respond within 10 minutes. Non spinning reserves within 30 minutes. Grid operator maintains reserves equal to at least the largest single contingency. Peakers and batteries provide.
Reactive power
Distinct from real power. Supports voltage. Synchronous generators provide historically. Grid forming inverters (batteries, some solar) increasingly provide. Contested compensation.
Black start capability
Ability to restart from full grid blackout without external power. Very rare need but critical when needed. Hydro plants and specific configured plants provide. Small dedicated pool.
Battery role expanding
Batteries earn revenue across capacity, energy arbitrage, and ancillary services simultaneously. This "value stacking" makes battery projects economic where any single revenue stream would not suffice. Growing battery share of ancillary services across markets.
Demand response
Demand response resources (large industrial consumers, aggregated residential loads) participate in capacity and ancillary markets by curtailing during grid stress. Grid operator pays for capability to reduce load.
FERC oversight
Federal Energy Regulatory Commission oversees interstate power markets including capacity and ancillary services. Multiple recent orders shaping market rules. Ongoing rulemaking on storage participation, DER integration, and capacity market design.
Where these markets are going
- Battery participation expansion.
- DER aggregation participation.
- Capacity market design reforms.
- Fast frequency response services emerging.
- Grid forming inverter services.
- Cross RTO integration.
- Renewables capacity accreditation debates.
Frequently asked questions
What is a capacity market?
Market paying generators to be available for reliability.
Do generators need capacity payments?
Peakers depend on them. Baseload less so.
What are ancillary services?
Grid stability products: frequency, voltage, reserves.
Why is Texas different?
Energy only market. High scarcity prices in principle sufficient.
Do batteries participate?
Yes and growing share.
Do renewables participate?
Yes with derated capacity credit.
Is demand response paid?
Yes for capacity and services.
Are capacity prices volatile?
Yes. Investment planning challenge.
Who runs these markets?
RTOs and ISOs under FERC oversight.
Where can I read more?
RTO market monitor reports, FERC dockets.
Summary
Capacity markets pay generators for being available; ancillary services markets pay for reliability products. Together they provide revenue beyond energy sales that supports grid reliability. PJM, NYISO, and ISO New England have formal capacity markets. Texas uses energy only. Batteries increasingly displacing fossil generators in ancillary services. Market design continues to evolve as generation mix changes.
Next reading
- How the electric grid works
- Peaker plants explained
- How grid batteries work
- Browse the UtilityRadar directory
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