Forward capacity markets aim to encourage reliability by retaining existing capacity and encouraging investment in new generating capacity at competitive rates one or more years before that electricity is needed. Several regional transmission organizations (RTOs) project the amount of capacity needed in future years, and to ensure reliability, they conduct auctions to secure the lowest-cost sources. These sources could be fossil fuel-fired generators, demand response providers, or supply side zero-carbon energy sources such as renewables or nuclear. Because power plants take time to build and require substantial capital, capacity auctions can help lower the risk for developers, especially if the developers are concerned that the plant may not operate at optimal levels. As a result of capacity market auctions, both new and existing power plants receive compensation to have capacity available when called on in the future.
Capacity markets operate by having resource owners compete in scheduled auctions to secure a commitment to supply capacity in the future. The auctions close when the RTO reaches a sufficient amount of capacity, both for individual zones and for the entire region. The price of the last offer accepted in the auction represents the clearing price, or the amount the RTO will pay all the suppliers that had capacity accepted in the auction. That clearing price forms the payment from the RTO to the supplier when it is multiplied by the amount of capacity accepted. The capacity market is only one component of the charges paid by electricity customers: in addition to capacity, most RTOs have separate markets for energy and ancillary services. Because RTOs use capacity markets to ensure that the supply of electric generation increases in correlation with electric demand, the cost of capacity to each customer is based on both the capacity rate and the customer’s consumption of energy.
Four RTOs (Independent System Operator for New England [ISO-NE], Midcontinent Independent System Operator [MISO], New York Independent System Operator [NYISO], and PJM) run capacity market auctions, each with different characteristics set by their market requirements. Auctions in ISO-NE and PJM call for capacity to be made available three years in the future, while forward commitments in the MISO and NYISO auctions are only for a few months.
The PJM system operator, for example, holds an auction each year to lock in capacity requirements for operation three years in the future. In subsequent years, PJM holds smaller balancing auctions (Incremental Auctions) each year before the delivery date where participants can adjust their initial commitments.
Clearing prices in PJM’s Base Residual Auction (BRA) have varied during its 15-year history. As shown in Figure 2, base clearing prices have varied by commitment period, from a high of $174/MW-day for the 2010–11 delivery period to a low of $16/MW-day for 2012–13. More recently, in the 10th auction, which covered the 2016–17 delivery period, PJM began its Capacity Performance (CP) product, which has more stringent availability standards. Because of that, clearing prices for the CP generally have been higher. PJM will hold its next BRA in May 2021 to cover the 2022-23 delivery period.
The Forward Capacity Market auction in ISO-New England is similar to PJM because it has a three-year forward period, is mandatory, and has a one-year commitment period. Resources compete in the ISO-NE auctions to obtain a commitment to supply capacity in exchange for a market-priced capacity payment. The clearing prices have ranged from a high of $314 MW-day for the 2018–19 commitment period to a low of $66 MW-day for the 2023–24 commitment period. Clearing prices had steadily declined between the 2015 Forward Capacity Market auction (commitment period 2018–19) and the 2020 Forward Capacity Market auction (2023–24 commitment period). However, at the most recent auction in 2021 (covering 2024–25), prices increased to $86 MW-day.