Capacity Market

Definition:
A system that compensates energy providers for maintaining reserve power capacity to ensure grid reliability.

Key Components:

• Capacity Auctions: Determines payments for available generation capacity.
• Demand Response Participation: Encourages large consumers to reduce demand during peak times.
• Grid Reliability Mechanisms: Ensures backup power is available when needed.

Use Cases/Industries:

• Utility Operations: Secures future electricity supply.
• Renewable Energy Integration: Balances intermittent solar and wind generation.
• Industrial Energy Users: Allows factories to monetize demand flexibility.

Advantages:

• Enhances Grid Stability: Ensures sufficient power generation during peak demand.
• Encourages Investment in Backup Power: Supports flexible generation resources.
• Reduces Blackout Risks: Incentivizes energy providers to maintain extra capacity.

Challenges:

• Market Complexity: Requires regulatory oversight to prevent market manipulation.
• Cost Implications: May increase electricity costs for consumers.

Related Terms: Resource Adequacy, Grid Reliability Market, Backup Power Incentives

Example:
A regional capacity market enabled grid operators to avoid brownouts by securing additional reserve power during extreme heat waves.