Capacity Market Mechanics

PJM's capacity market pays generators anywhere from about $10 to nearly $100 per kW-year to commit to being available during peak periods three years from now. A 500 MW gas plant clearing at the 2024 record price receives roughly $49 million annually just for promising to show up. It earns energy market revenue on top of that. This is the capacity market's solution to the missing money problem: pay for availability, not just production.

The mechanism works through forward auctions. PJM's Reliability Pricing Model (RPM) holds an auction three years before each delivery year. The RTO determines how much capacity is needed (peak load plus a reserve margin), generators bid the price at which they are willing to commit, and the auction clears at the price where supply meets the requirement. All cleared generators receive the same clearing price.

The demand curve. PJM uses a sloped demand curve rather than a fixed quantity. If supply is abundant, the clearing price falls toward zero. If supply is tight, the price rises steeply. In 2024, PJM's capacity price spiked to $270/MW-day (roughly $98,000/MW-year) for the 2025-2026 delivery year, reflecting tightening supply as coal plants retired faster than replacements were built.

Do capacity markets actually prevent blackouts?

They ensure adequate investment, not necessarily adequate performance. A capacity commitment means "I will be available." It does not guarantee the plant will actually work when called. During Winter Storm Elliott (2022), roughly 90 GW of capacity across the Eastern Interconnection failed simultaneously, much of it holding capacity obligations. Penalties for non-performance exist but have historically been too low to prevent this gap.

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