Capacity market
An auction that pays resources for being available in the future, whether or not they end up producing energy.
Energy markets pay for megawatt-hours actually delivered. Capacity markets pay for something different: a commitment to be available during future stress periods. Resources that clear a capacity auction receive a steady payment — dollars per megawatt-day — and in exchange must show up when the grid operator calls, or face penalties.
The design exists to answer a hard question: will enough capacity be there in three years, on the hottest afternoon or coldest morning? PJM runs the largest US capacity market, procuring commitments years ahead through its Base Residual Auction. NYISO and ISO-NE run their own capacity constructs, with prices that vary by location — downstate New York capacity is worth far more than upstate, because the wires into the city are constrained.
ERCOT famously has no capacity market at all. It is an 'energy-only' market that relies on high scarcity prices — rather than capacity payments — to reward availability and attract investment. The debate between the two designs is one of the oldest arguments in electricity market economics, and capacity auction results are among the most market-moving publications in the eastern US: a tight auction can reprice a whole region's generation fleet.
For the technical reader
Capacity constructs procure a target quantity (derived from forecast peak load plus a reserve margin) against a downward-sloping demand curve, clearing locationally where transmission limits import capability into constrained zones. Cleared resources take on a must-offer/performance obligation for the delivery period; under performance designs like PJM's, underperformance during declared stress events triggers substantial penalties, transferring payments to over-performers.
Accreditation — how many MW of capacity credit a resource earns — is the design's live controversy: thermal accreditation increasingly reflects correlated outage risk (winterization, fuel security), while storage and renewables are accredited by marginal reliability contribution methods (e.g. marginal ELCC), which decline with penetration. The auction clearing price interacts directly with energy-market expectations, since capacity revenue plus expected energy margin must cover a marginal resource's cost of new entry.