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CapOptix: An Options-Framework for Capacity Market Pricing

Author

Listed:
  • Millend Roy
  • Agostino Capponi
  • Vladimir Pyltsov
  • Yinbo Hu
  • Vijay Modi

Abstract

Electricity markets are under increasing pressure to maintain reliability amidst rising renewable penetration, demand variability, and occasional price shocks. Traditional capacity market designs often fall short in addressing this by relying on expected-value metrics of energy unserved, which overlook risk exposure in such systems. In this work, we present CapOptix, a capacity pricing framework that interprets capacity commitments as reliability options, i.e., financial derivatives of wholesale electricity prices. CapOptix characterizes the capacity premia charged by accounting for structural price shifts modeled by the Markov Regime Switching Process. We apply the framework to historical price data from multiple electricity markets and compare the resulting premium ranges with existing capacity remuneration mechanisms.

Suggested Citation

  • Millend Roy & Agostino Capponi & Vladimir Pyltsov & Yinbo Hu & Vijay Modi, 2025. "CapOptix: An Options-Framework for Capacity Market Pricing," Papers 2512.12871, arXiv.org.
    • Handle: RePEc:arx:papers:2512.12871
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    References listed on IDEAS

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