Capacity auctions in electricity markets are competitive procurements run by regional grid operators to lock in enough power supply for future years. Rather than paying for electricity that is actually generated, these auctions pay resource owners a fee for their commitment to be available when the grid needs them. Bids are submitted through electronic portals, a single clearing price is set for each zone, and the resulting cost flows through utilities to consumers’ bills. In PJM, the largest of these markets, the 2026/2027 auction committed $16.1 billion in capacity payments.1PJM. 2026/2027 Base Residual Auction Report
Who Runs Capacity Auctions
Four Regional Transmission Organizations or Independent System Operators currently run capacity markets under Federal Energy Regulatory Commission oversight: PJM Interconnection across much of the Mid-Atlantic and parts of the Midwest, ISO New England, the New York Independent System Operator, and the Midcontinent Independent System Operator.2Federal Energy Regulatory Commission. Understanding Wholesale Capacity Markets Each shares the same purpose but sets its own auction format, timing, and rules.
Not every region uses this model. Texas, operating its own grid through ERCOT largely outside FERC jurisdiction, relies on high energy prices during scarcity events to keep generators online. California’s grid operator uses a resource adequacy framework where each utility must show it has enough contracted capacity, without a centralized auction. The capacity auction exists where policymakers concluded that energy-market revenues alone would not keep enough plants running or attract new investment.3U.S. Government Accountability Office. Electricity Markets – Four Regions Use Capacity Markets to Help Ensure Adequate Resources, but FERC Has Not Fully Assessed Their Performance
What Resources Can Bid
Participation is broad. Natural gas plants form the backbone of most capacity markets because they ramp quickly during demand spikes. Coal, nuclear, and hydroelectric facilities also bid as traditional dispatchable resources. Large-scale battery storage has become a prominent participant, offering the ability to discharge during peak stress.
Wind and solar can bid too, but their capacity contributions are discounted because output depends on weather. Grid operators use a statistical method called Effective Load Carrying Capability to determine how much capacity credit a renewable resource actually earns. A 100-megawatt solar farm might receive credit for only about 21 megawatts, the amount the grid can reliably count on during hours when outages are most likely. Onshore wind fares even lower, with a median capacity credit around 11% of nameplate.4National Renewable Energy Laboratory. Average and Marginal Capacity Credit Values of Renewable Energy These credits shrink further as more renewable capacity is added, because each additional panel or turbine tends to produce power at the same time as the others, reducing its incremental reliability value.
Rules also separate existing resources, which already operate and seek to continue their commitment, from new resources still in development that need a cleared bid to secure financing or justify completion.
Demand Response and Aggregated Small Resources
Capacity markets pay large consumers to cut usage on demand, not just generators to produce. A factory that can drop 10 megawatts during a grid emergency counts, from a reliability standpoint, like a 10-megawatt generator. These demand response participants typically work through aggregators called Curtailment Service Providers, who bundle curtailment capability from multiple commercial and industrial facilities and handle the bidding.5PJM. Demand Response The reductions must be genuine cuts below normal operating patterns.
Smaller distributed resources can now participate through FERC Order 2222, which requires grid operators to allow aggregations of rooftop solar, batteries, smart thermostats, electric vehicles, and similar small-scale assets to bid as a combined unit.6Federal Energy Regulatory Commission. FERC Order No. 2222 Explainer – Facilitating Participation in Electricity Markets by Distributed Energy Resources The rule applies across FERC-regulated RTO and ISO territories but not to ERCOT in Texas.
Qualifying Before the Auction
Every resource must pass a qualification process before it can bid. Owners submit technical data through secure operator portals, including nameplate capacity and net dependable capacity, and provide documentation of interconnection rights showing the facility can physically and legally inject power into the regional grid.
Standardized certification forms are also required. PJM’s Officer Certification Form asks a corporate executive to attest to the accuracy of technical specifications and the company’s genuine intent to deliver the megawatts it offers.7PJM. Demand Resource Sell Offer Plan Officer Certification Form New projects submit implementation plans with construction milestones and expected commercial operation dates. Financial security requirements, typically letters of credit or cash deposits, filter out speculative bidders and protect the grid operator if a resource fails to meet its obligations. The review takes several months. Once approved, the resource can access the electronic bidding platform during the auction window.
How the Bidding and Clearing Work
Qualified participants submit sealed price-and-quantity offers through the operator’s electronic portal, specifying the minimum price they will accept to keep a resource available for a future delivery period. Most auctions look about three years forward. ISO New England, for example, holds its Forward Capacity Auction annually, three years before the capacity is needed, giving operators and developers time to build or upgrade.8ISO New England. Forward Capacity Market
FERC describes the general approach as sealed bids offering capacity at specific prices, with the auction ending when total offered capacity matches the region’s needs.2Federal Energy Regulatory Commission. Understanding Wholesale Capacity Markets A single clearing price applies to all cleared resources in a given zone. That uniform-price structure encourages participants to bid their true costs. Bidding above cost risks being excluded; bidding at cost ensures the resource clears whenever the market price covers its expenses.
The Demand Curve and Net CONE
Capacity markets do not use a fixed procurement target. PJM, for example, applies a downward-sloping Variable Resource Requirement curve that produces a higher price when capacity is scarce and a lower one when there’s a surplus.9PJM. Fifth Review of PJM Variable Resource Requirement Curve The curve is anchored to Net Cost of New Entry, the estimated cost of building a new power plant minus the revenue it would earn from selling energy and ancillary services. Net CONE answers a specific question: how much does a new generator need from capacity payments alone to justify being built? Operators recalculate the benchmark periodically, and it sets the reference point for price caps and the shape of the curve.
Why Prices Differ by Location
Capacity does not clear at one price across a region. Transmission bottlenecks mean some areas cannot easily import power, so those constrained zones need more local generation and clear higher. Operators divide their territory into Locational Deliverability Areas reflecting these transmission realities. In PJM’s 2026/2027 auction, the market cleared at the cap of $329.17 per megawatt-day, and individual zones in prior auctions have cleared well above the base region price because of local constraints, load growth, and generator retirements.1PJM. 2026/2027 Base Residual Auction Report Locational pricing directs new investment toward the areas where the grid needs it most.
Price Caps and Market Mitigation
Because capacity markets involve enormous sums and limited competition in some zones, FERC requires safeguards against both seller market power and artificially low bids. Sellers with market power in constrained zones face offer caps to prevent inflated prices. On the buyer side, a Minimum Offer Price Rule has historically prevented state-subsidized resources from bidding below their true costs and suppressing prices for other participants. FERC found that out-of-market payments provided by states to support certain generators threatened the competitiveness of PJM’s capacity market and directed PJM to expand the rule in 2019.10Federal Energy Regulatory Commission. FERC Directs PJM to Expand Minimum Offer Price Rule The rule has been repeatedly reformed and sits at the tension point between federal market integrity and state clean-energy policies that subsidize particular generation types.
The demand curve itself also caps the price. Because it is anchored to Net CONE, there is an effective ceiling on how high the clearing price can go. The 2026/2027 PJM auction cleared at that cap, a signal that supply was tight enough to push the market to its maximum allowed level.12PJM. 2026/2027 Base Residual Auction Report
What Happens After a Resource Clears
Clearing creates a binding obligation to perform during the delivery year, not just a paper commitment. The delivery year typically begins about three years after the auction, and during that year the grid operator can call on the resource at any time.
Verification tests require the resource to sustain its promised output for at least one continuous hour. PJM calls these Capability Verification Tests and can initiate them without advance notice.11PJM. PJM Manual 21 – Rules and Procedures for Determination of Generating Capability Failing a test or falling short on availability can reduce payments or forfeit previously earned revenue.
The real financial teeth arrive during performance assessment events, when the grid is genuinely stressed. PJM’s penalty rate for non-performance during these events runs approximately $2,300 per megawatt-hour, with a stop-loss limit set at 1.5 times the auction clearing price for the delivery area.13PJM. Load Management and PRD Event Performance Proposed Solution A resource offline when the grid needs it most can lose far more in penalties than it earned from its capacity commitment. That asymmetry is intentional, pushing owners to invest in maintenance, fuel contracts, and backup equipment rather than gamble on availability.
Incremental Auctions Between Base and Delivery
The base auction is not the final word. Circumstances change in the years between the auction and the delivery year: a plant announces early retirement, load forecasts shift, or a new transmission project alters the topology. To accommodate that, operators run incremental auctions. PJM holds up to three before the delivery year begins, allowing replacement procurement and adjustments to capacity commitments based on updated reliability requirements. A conditional incremental auction may also occur if a major transmission line is delayed and creates a localized reliability gap.14PJM. PJM Manual 18 These follow-up auctions keep the commitment aligned with reality rather than freezing a three-year-old snapshot.
How Auction Costs Reach Your Bill
Every dollar spent in a capacity auction ultimately comes from electricity consumers. Utilities and load-serving entities pay capacity costs to generators and demand response providers at the prices set through the auction, and those costs pass through to consumers as part of their electricity bills.2Federal Energy Regulatory Commission. Understanding Wholesale Capacity Markets On a residential bill, capacity charges may appear as a separate line item or be bundled into the overall supply charge, depending on the utility.
The scale has grown sharply. PJM’s capacity clearing price sat below $35 per megawatt-day for the 2023/2024 and 2024/2025 delivery years, then surged to $269.92 for 2025/2026 and hit the auction cap of $329.17 for 2026/2027. Total PJM capacity procurement jumped from $14.7 billion for 2025/2026 to $16.1 billion for 2026/2027.1PJM. 2026/2027 Base Residual Auction Report The jump reflects tightening supply as older generators retire faster than new ones are built, alongside rising demand from data centers and electrification of transportation and heating. FERC’s core mandate is ensuring the resulting prices are “just and reasonable,” balancing reliability against the cost burden on consumers.3U.S. Government Accountability Office. Electricity Markets – Four Regions Use Capacity Markets to Help Ensure Adequate Resources, but FERC Has Not Fully Assessed Their Performance