Capacity Markets Explained: How to Get Paid for Being Available
Understand how capacity markets work in IESO, PJM, and other ISOs, and how your facility can earn revenue just for committing to reduce load when needed.
What Are Capacity Markets?
Capacity markets are mechanisms used by grid operators to ensure sufficient resources are available to meet future electricity demand. Unlike energy markets that pay for actual electricity consumed, capacity markets pay for the commitment to provide power or reduce demand when called upon.
Why Do Capacity Markets Exist?
Electricity must be generated at the exact moment it’s consumed. There’s no warehouse for storing bulk power. Grid operators must ensure they have enough generation and demand-side resources to cover peak demand plus a reserve margin.
Building power plants is expensive, and they may only run a few hundred hours per year during peaks. Capacity markets provide a revenue stream that makes these resources economically viable.
How Demand-Side Resources Participate
Your facility can participate in capacity markets as a demand-side resource by committing to reduce consumption during capacity events. Here’s how it works:
1. Qualification
Your facility’s curtailment capability is tested and verified through a baseline measurement process.
2. Commitment
You commit a specific amount of load reduction (in MW) for a delivery period, typically one year.
3. Availability Payments
You receive capacity payments monthly or annually, regardless of whether you’re called to perform.
4. Performance Events
When grid conditions require it, you reduce load as committed. Meeting your commitment earns full payment; underperformance may result in penalties.
Capacity Market Examples
PJM Reliability Pricing Model (RPM)
The largest capacity market in North America, covering 13 states. Demand response resources can participate directly or through aggregators, earning capacity credits for committed load reductions.
IESO Capacity Auction
Ontario’s IESO runs capacity auctions to procure resources for future commitment periods. Demand response providers can bid their curtailment capability into these auctions.
NYISO Capacity Markets
New York’s capacity markets provide opportunities for demand response resources, with particular value in downstate regions facing transmission constraints.
Revenue Example
A 5 MW industrial facility participating in PJM capacity markets might earn:
- Capacity payments: $50-75/MW-day × 365 days × 5 MW = $91,000 – $137,000/year
- Plus: Additional payments for actual curtailment events
Key Considerations
Commitment is binding: Once you commit capacity, you must be available throughout the delivery period.
Performance matters: Capacity markets have performance requirements. Failing to reduce load when called can result in significant penalties.
Aggregation helps: Working with an aggregator like Rodan Energy provides expertise in bidding strategies, performance optimization, and risk management.
Calculate your capacity market potential or contact us for a detailed assessment.
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