Wholesale Electricity Market Structure

A wholesale electricity market is not one market. It is at least three running simultaneously, each clearing on a different time horizon and pricing a different product.

The three layers are the day-ahead energy market (generators bid to supply energy for each hour of the following day), the real-time energy market (5-15 minute intervals that correct for deviations between day-ahead schedules and actual conditions), and capacity markets (annual auctions where generators are paid to be available during future peak periods, whether or not they actually run). Ancillary service markets operate alongside these, procuring frequency regulation, reserves, and voltage support.

Day-ahead prices are typically less volatile because they reflect forecasted conditions. Real-time prices can spike dramatically when forecasts miss (unexpected plant outages, weather shifts). Capacity payments exist because energy-only markets may not provide enough revenue for peaking plants that run only a few hundred hours per year but are essential for reliability.

Why three markets instead of one? A gas peaker that runs 200 hours per year cannot recover its fixed costs from energy revenue alone at, say, $120/MWh for 200 hours ($24,000/MW).

How does the peaker stay financially viable?

Capacity payments fill the gap. In PJM's capacity market, a peaker might receive $50,000-$100,000/MW-year for the commitment to be available. This payment, funded by load-serving entities and ultimately ratepayers, keeps resources online that would otherwise retire. The design is controversial: critics argue capacity markets overpay incumbents and suppress entry by new technologies like storage.

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