Energy-only or capacity market? How wholesale markets are designed for high renewable shares

Clear a year of hourly prices, watch solar’s value fall as it grows, then pay for peakers two ways

Analyst lesson A3 of Energy Systems, Step by Step: clear a year of hourly prices on the Plains market, see negative prices and solar’s falling capture price, and compare energy-only and capacity-market designs.
  • Analyst · L2
  • 30 min guided · about 30 min practice
  • After lesson 8

The Plains market for one year: 3,000 MW of wind, 1,200 MW of solar, 700 MW of gas peakers (illustrative)

  1. On a spring midday wind and sun exceed demand and the price is −$25.00/MWh; on a summer evening only 401 MW are spare and scarcity pricing lifts it to $586.76.
  2. Over the year the price averages $35.79/MWh, with 111 negative-price hours and 155 scarcity hours.
  3. From 1,200 to 2,800 MW of solar, solar's capture price falls from $33.16 to $7.38 per MWh.
  4. Energy-only, a new peaker falls $25 per kW a year short of its fixed cost; at 600 MW of peakers a new one pays, and the year has 2 hours short.
  5. Existing peakers cover their upkeep up to 900 MW, so from 700 to 900 MW none is built and none retires: simplified thresholds.
  6. With the simplified capacity market, its price set to fill a new peaker's gap, the capacity price is $191/MW-day; consumers pay $40.79/MWh against $39.89 energy-only (table below).
New plant Fixed cost ($/kW a year) Margin after running costs, energy-only Margin with the payment, simplified capacity market
Wind farm $134 $160 $162
Solar farm $109 $122 $118
Gas combined cycle $72 $84 $84
Gas peaker $74 $49 $74
Consumers pay ($/MWh) – $39.89 $40.79
Where How capacity is paid for Sources
U.S. markets with a capacity market An energy market with shortage pricing, plus auctions that buy capacity ahead of time: PJM's base auction is normally held three years before the delivery year; MISO's auction has run by season since 2023. PJM's capacity price was $269.92/MW-day for most of its region in 2025/26 (two zones cleared higher, at their caps) and $325, at the cap, for its entire region in 2028/29. FERC staff, Energy Primer (December 2023), p. 72; PJM Manual 18, Rev. 63 (effective 24 September 2026), section 5.1; PJM, 2028/2029 auction release (14 July 2026); PJM, 2025/2026 auction release (30 July 2024); PJM, 2025/2026 Base Residual Auction report; MISO, news release (17 May 2023): the new seasonal approach
Texas (ERCOT) An energy market with no capacity market; offers are capped at $5,000/MWh. A reserve demand curve added a scarcity adder from 2014; since 5 December 2025, energy and reserves are priced together. The offer cap fell from $9,000 to $5,000 per MWh on 1 January 2022. ERCOT, 2024 Biennial Report on the ORDC (1 November 2024), pp. 1 and 7–10; ERCOT market notice M-F110525-04 (5 December 2025): real-time co-optimization live; ERCOT market notice M-A120721-01 (7 December 2021); FERC staff, Energy Primer (December 2023), p. 66
U.S. regions without a regional market (RTO) Utilities, frequently vertically integrated, own and run plants and wires and plan their supply with their state regulators. About two-thirds of the U.S. population is served by markets that RTOs run; much of the rest by these utilities. FERC staff, Energy Primer (December 2023), pp. 60 and 66
The European Union Energy markets set the wholesale price; a country may add a capacity mechanism, approved as state aid. The 2024 reform entered into force on 16 July 2024; from 17 July 2027, new direct price support for wind, solar and some other plants must be two-way contracts for difference: top-ups below an agreed price, paybacks above. European Commission, Electricity market design (page accessed 5 November 2026); Regulation (EU) 2024/1747, Article 19d, adopted 13 June 2024 (Official Journal, 26 June 2024): two-way contracts for difference from 17 July 2027; European Commission, questions and answers QANDA/24/2260 (21 May 2024); European Commission, news (12 March 2025)
China Capacity payments set nationally, technology by technology, coal's since 2024; a January 2026 notice revised them and set a national framework for grid-side storage. Coal's payment covered 30% of a set fixed cost in most provinces in 2024–25 and at least 50% from 2026. Once a province's spot market runs continuously, one payment for reliable capacity is to replace payments by technology. NDRC, questions and answers with NDRC and National Energy Administration officials on the notice improving the generation-side capacity price mechanism (30 January 2026); Ember, From baseload to flexibility: How is coal's role in China changing (10 February 2026), section 1.3.1, pp. 14–16

With JavaScript on, you clear hours and a year, add solar, move the peaker fleet and switch between the two designs.

  • A teaching market: the Plains market's fleet, the coal offer, the $25 credit, the scarcity curve and the capacity market's $1,000 cap are illustrative.
  • Real shapes: the Southwest Power Pool's 2025 demand, wind and sun (EIA-930), scaled to EIA's 2025 capacity factors.
  • Gas running costs and new plants' building and upkeep costs are lesson 7's, from EIA, in 2025 dollars, at 4% real over 30 years.
  • One year, every unit at its average availability: no random outages (A5 adds them), no network, no imports.
  • The $5,000/MWh cap is ERCOT's offer cap since 1 January 2022. Here it also caps the clearing price, a simplification; real rules differ in many details.
  • The capacity market is simplified: its price is set to fill a new peaker's gap, with no auction against a requirement.

Need a refresher? Lesson 8 (merit order and the clearing price) and lesson 7 (what electricity costs to make).

What you just did, as diagrams

Energy-only market
No separate capacity payment: energy and reserve prices, high in a few scarce hours, pay for capacity that is rarely used.
Capacity market
A planner sets how much capacity to buy, and an auction pays for it on top of energy prices; this lesson's version is simplified.
Reserve products
Spare capacity is priced hour by hour together with energy, in either kind of market.
Capture price
The average price a plant's output earns; for solar it falls as more solar sells in the same hours.
Missing money
The gap between what a needed plant earns from energy and reserves and what it costs to keep.
Go deeper · AnalystWhat the toy leaves to real markets
  • Scarcity curves are drawn by rules. ERCOT priced reserves with an operating reserve demand curve from 2014; since 5 December 2025 it prices energy and reserves together.
  • Capacity demand curves. Real auctions buy along a sloped curve, not a fixed amount, with caps and floors set in tariffs.
  • Accreditation moves money. A capacity price is paid on rated MW, so the ratings of lesson A5 decide who earns it.
Go deeper · ModelerThe clearing in symbols
  • Price. With spare \(s_t \ge 0\) MW: \(p_t = c_{m(t)} + (\bar p - c_{m(t)})\,\max(0, 1 - s_t/600)^2\) per MWh, where \(c_{m(t)}\) is the last offer needed and \(\bar p\) the cap.
  • Short. With \(s_t < 0\), demand exceeds supply: \(p_t = \bar p\) and \(-s_t\) MW go unserved. So \(p_t \le \bar p\) in every hour.
  • Margin. A plant earns \(\sum_t (p_t - c)\,q_t\) a year, with \(q_t\) its MWh in hour \(t\) and \(c\) its running cost; wind and solar earn \(\sum_t (p_t + 25)\,q_t\), the credit included.
  • Capacity price. \(\max(0, F - \pi)/0.93\) per rated kW a year, with \(F\) a new peaker’s fixed cost and \(\pi\) its energy margin per kW: the gap is filled by construction.

Check yourself

Myth or fact? “A negative price means the market is broken.”

  • Myth
  • Fact
Answer

Myth. It means the last offer needed would rather pay than stop: here wind and solar keep a $25 credit per MWh, in 111 hours of the year.

Myth or fact? “A solar farm earns about the average market price.”

  • Myth
  • Fact
Answer

Myth, once solar is common. Here its capture price is 93% of the average at 1,200 MW and 32% at 2,800 MW. In CAISO in 2023 solar's value factor, a broader measure with capacity value, was 38%.

Myth or fact? “An energy-only market avoids paying for capacity.”

  • Myth
  • Fact
Answer

Myth. It pays through scarcity prices instead: with 700 MW of peakers here, consumers pay $39.89/MWh energy-only and $40.79/MWh with the simplified capacity market.

Myth or fact? “A capacity auction clearing at its cap can mean thinner reserves without certain outages.”

  • Myth
  • Fact
Answer

Fact. PJM's 2028/29 auction cleared at its cap, 6,831 MW short of its requirement, measured against a standard of one shortfall event in ten years.

The last offer needed is $39.37/MWh, the cap $5,000 and 401 MW are spare against a 600 MW threshold. Roughly what is the price, with the lesson's curve?

  • $39.37
  • $5,000
  • About $585
  • About $1,690
Answer

39.37 + (5,000 − 39.37) × (1 − 401 ÷ 600)² = 39.37 + 4,960.63 × 0.110 ≈ $585 per MWh. Step 1 shows $586.76: its spare is 400.7 MW before rounding.

A capacity price of $69.59 per kW a year is how much per MW-day?

  • $69.59
  • About $191
  • $25,400
  • $0.19
Answer

69.59 × 1,000 ÷ 365 = 190.66, about $191 per MW-day: kW to MW, a year to days.

Numbers, sources and what’s next

Numbers to remember

Number What it means Source
$5,000/MWh ERCOT's system-wide offer cap since 1 January 2022, down from $9,000. ERCOT notice M-A120721-01 · 7 December 2021
$325/MW-day PJM's 2028/29 capacity price, at its cap, for its entire region; $269.92 for most of its region in 2025/26. PJM release · 14 July 2026
38% Solar's value factor in CAISO in 2023 (energy plus capacity value, over a flat block's), where solar served 27% of load. LBNL, Utility-Scale Solar 2024, slides 47 and 50
16 July 2024 The EU's electricity market design reform enters into force. European Commission · accessed 5 November 2026

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Sources and further reading

Spotted an error, or stuck? Write to hlli@ksu.edu. Corrections are made in place and dated here.

Text licensed CC BY 4.0, code MIT: teachers and students may reuse and adapt it, with credit to Honglin Li.