What is the purpose of capacity payments in energy markets?

The purpose of capacity payments in energy markets is to incentivize generators to maintain availability for future demand. These payments are designed to ensure that there is sufficient generation capacity available when it is needed, particularly during peak demand periods. By providing financial compensation to generators for being available, even if they are not producing energy at that moment, capacity payments help to stabilize the grid and ensure reliability of service. This is crucial in preventing blackouts and ensuring that the energy supply can meet consumer demand at all times.

Capacity payments act as a mechanism to encourage investment in generation resources, thereby promoting a reliable power supply. They are particularly important in markets where there may be fluctuations in energy supply and demand, ensuring that generators are financially motivated to be prepared for times when electricity demand peaks. This approach supports the overall stability and resilience of the energy market, benefiting both consumers and suppliers alike.