IDEAS home Printed from https://ideas.repec.org/a/sae/enejou/v47y2026i1p45-76.html

Cost-Effective Capacity Markets

Author

Listed:
  • Christoph Graf
  • Christopher Holt
  • Burçin Ãœnel

Abstract

We develop a model of a wholesale electricity market with energy and capacity market components to examine the economic relationship between costs and reliability. We investigate the importance of efficient resource accreditation—the amount by which to compensate resources for their contribution to system reliability. We use an analytical model to formalize the concept of optimal accreditation in a simplified theoretical setting, and demonstrate that “marginal effective load carrying capability,†a method for measuring resources’ reliability value increasingly adopted by system operators, is an approximation of our theoretical measure of marginal contribution to reliability. Applying our model to the PJM system, we empirically assess reliability costs, estimating that current reliability standards implicitly value a potential supply shortage at $54,000 to $77,000 per megawatt hour. Market outcomes are highly dependent on the accreditation method; inaccurate heuristics achieve reliability at 0.3% to 100% greater costs than the most efficient method. By displacing expensive generation resources, improving reliability causes increases in capacity market payments that are largely, but not entirely, offset by decreases in energy market payments. JEL Classification: D47 Market Design; Q41 Energy: Demand and Supply; Prices; Q40 Energy: General; Q42 Alternative Energy Sources

Suggested Citation

  • Christoph Graf & Christopher Holt & Burçin Ãœnel, 2026. "Cost-Effective Capacity Markets," The Energy Journal, , vol. 47(1), pages 45-76, January.
    • Handle: RePEc:sae:enejou:v:47:y:2026:i:1:p:45-76
    DOI: 10.1177/01956574251379783
    as

    Download full text from publisher

    File URL: https://journals.sagepub.com/doi/10.1177/01956574251379783
    Download Restriction: no
    File URL: https://libkey.io/10.1177/01956574251379783?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Aagaard, Todd & Kleit, Andrew N., 2023. "Marginal vs. average effective load carrying capability: How should capacity markets deal with alternative generation forms?," Utilities Policy, Elsevier, vol. 84(C).
    2. Joskow, Paul L., 2008. "Capacity payments in imperfect electricity markets: Need and design," Utilities Policy, Elsevier, vol. 16(3), pages 159-170, September.
    3. Bichuch, Maxim & Hobbs, Benjamin F. & Song, Xinyue, 2023. "Identifying optimal capacity expansion and differentiated capacity payments under risk aversion and market power: A financial Stackelberg game approach," Energy Economics, Elsevier, vol. 120(C).
    4. repec:aen:journl:ej38-si1-bothwell is not listed on IDEAS
    5. Cynthia Bothwell & Benjamin F. Hobbs, 2017. "Crediting Wind and Solar Renewables in Electricity Capacity Markets: The Effects of Alternative Definitions upon Market Efficiency," The Energy Journal, , vol. 38(1_suppl), pages 173-188, June.
    6. Paul L Joskow, 2019. "Challenges for wholesale electricity markets with intermittent renewable generation at scale: the US experience," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 35(2), pages 291-331.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Simshauser, Paul, 2026. "Are gas turbines ‘bankable’ in transitioning energy-only markets?," Energy Economics, Elsevier, vol. 158(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Chattopadhyay,Debabrata & Suski,Adam Krzysztof, 2022. "Should Electricity Market Designs Be Improved to Drive Decarbonization ?," Policy Research Working Paper Series 10207, The World Bank.
    2. Simshauser, Paul, 2026. "Are gas turbines ‘bankable’ in transitioning energy-only markets?," Energy Economics, Elsevier, vol. 158(C).
    3. Keppler, Jan Horst & Quemin, Simon & Saguan, Marcelo, 2022. "Why the sustainable provision of low-carbon electricity needs hybrid markets," Energy Policy, Elsevier, vol. 171(C).
    4. Csereklyei, Zsuzsanna & Kallies, Anne, 2024. "A legal-economic framework of wholesale electricity markets: Assessing Australia's transition," Energy Policy, Elsevier, vol. 195(C).
    5. David P. Brown & David E. M. Sappington, 2025. "The Impact of Wholesale Price Caps on Forward Contracting," The Energy Journal, , vol. 46(4), pages 253-288, July.
    6. Shimomura, Mizue & Keeley, Alexander Ryota & Matsumoto, Ken'ichi & Tanaka, Kenta & Managi, Shunsuke, 2024. "Beyond the merit order effect: Impact of the rapid expansion of renewable energy on electricity market price," Renewable and Sustainable Energy Reviews, Elsevier, vol. 189(PB).
    7. Biggar, Darryl R. & Hesamzadeh, Mohammad Reza, 2024. "Crises in Texas and Australia: Failures of energy-only markets or unforeseen consequences of price caps?," Energy Economics, Elsevier, vol. 137(C).
    8. Simshauser, Paul, 2024. "On static vs. dynamic line ratings in renewable energy zones," Energy Economics, Elsevier, vol. 129(C).
    9. Biggar, Darryl R. & Hesamzadeh, Mohammad Reza, 2025. "The capacity market debate: What is the underlying market failure?," Utilities Policy, Elsevier, vol. 95(C).
    10. Cristian Junge & Dharik Mallapragada & Richard Schmalensee, 2022. "Energy Storage Investment and Operation in Efficient Electric Power Systems," The Energy Journal, , vol. 43(6), pages 1-24, November.
    11. Lo Prete, Chiara & Palmer, Karen & Robertson, Molly, 2024. "Time for a Market Upgrade? A Review of Wholesale Electricity Market Designs for the Future," RFF Reports 24-09, Resources for the Future.
    12. Csereklyei, Zsuzsanna & Kallies, Anne, 2022. "A legal-economic framework of electricity markets: Assessing Australia’s transition," MPRA Paper 114191, University Library of Munich, Germany.
    13. Fabra, Natalia, 2023. "Reforming European electricity markets: Lessons from the energy crisis," Energy Economics, Elsevier, vol. 126(C).
    14. Khezr, Peyman & Nepal, Rabindra, 2021. "On the viability of energy-capacity markets under decreasing marginal costs," Energy Economics, Elsevier, vol. 96(C).
    15. Simshauser, Paul, 2021. "Vertical integration, peaking plant commitments and the role of credit quality in energy-only markets," Energy Economics, Elsevier, vol. 104(C).
    16. Mallapragada, Dharik S. & Junge, Cristian & Wang, Cathy & Pfeifenberger, Hannes & Joskow, Paul L. & Schmalensee, Richard, 2023. "Electricity pricing challenges in future renewables-dominant power systems," Energy Economics, Elsevier, vol. 126(C).
    17. Lo Prete, Chiara & Palmer, Karen & Robertson, Molly, 2025. "Time for a market upgrade? A review of wholesale electricity market designs for the future," Energy Economics, Elsevier, vol. 148(C).
    18. Andor, Mark A. & Frondel, Manuel & Schmidt, Christoph M. & Simora, Michael & Sommer, Stephan, 2015. "Klima- und Energiepolitik in Deutschland: Dissens und Konsens," RWI Materialien 91, RWI - Leibniz-Institut für Wirtschaftsforschung.
    19. Ibrahim Abada & Andreas Ehrenmann, 2026. "When Market Incompleteness Is Preferable to Market Power: Insights from Power Markets," Operations Research, INFORMS, vol. 74(2), pages 573-595, March.
    20. Pär Holmberg & Robert A. Ritz, 2021. "Optimal Capacity Mechanisms for Competitive Electricity Markets," The Energy Journal, , vol. 42(1_suppl), pages 1-34, June.

    More about this item

    Keywords

    ;
    ;
    ;

    JEL classification:

    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sae:enejou:v:47:y:2026:i:1:p:45-76. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: SAGE Publications (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.