The National Electricity Plan (2026), developed by the Ministry of Power, introduces several modern concepts, notably ‘capacity markets’. This initiative has been followed by the Central Electricity Regulatory Commission (CERC), which has issued a ‘staff paper’ on the subject for public comment.
The concept of ‘capacity markets’ can be complex in the Indian context, where a two-part tariff system already compensates power generators through fixed capacity charges. Currently, power generators with long-term power purchase agreements (PPAs) receive compensation via a two-part tariff that includes both a fixed capacity charge and a variable energy charge, guaranteeing payment regardless of whether the plant is operational.
The ‘capacity market’ aims to separate the two components of the tariff further. It treats capacity as a distinctly traded, competitively priced product, allowing developers to establish capacities within this market, albeit without guaranteed cost recovery. Instead, they would compete based on market prices, with the lowest-cost capacity winning contracts.
The essence of the ‘capacity market’ approach is that generators will no longer receive administratively assured payments for their capacity availability; instead, they must compete to recover their costs, similar to their energy sales.
As the share of renewable energy increases, the power system requires generators that may operate infrequently but are available on short notice—a shift driving the interest in capacity market mechanisms. The CERC staff paper articulates this concern: “India’s power system is changing rapidly due to the growing share of renewable energy, especially solar and wind, whose output is intermittent.” The paper questions whether a system that compensates generators for simply being available could be beneficial alongside the existing energy-only market structure.
The staff paper points out that renewable-heavy systems encounter scenarios where generation from solar or wind sources can suddenly decrease while demand remains high. In these situations, the grid must rely on dispatchable or flexible resources—such as thermal plants, hydro stations, storage systems, gas plants, and demand-response options—to ensure reliability.
However, many of these resources may struggle to remain financially viable if their income relies solely on selling electricity in spot markets—especially when low market-clearing prices arise from abundant renewable energy. Consequently, the CERC is exploring the ‘capacity market’ concept to allow generators to receive payments not only for the actual energy supplied but also for maintaining availability. This mechanism would ensure that power plants are compensated for being ready to supply electricity whenever required. The staff paper emphasizes that the current issue is not an immediate shortage of installed capacity—many regions in India currently have surplus capacity—but rather the future adequacy and financial sustainability of reliable generation as the energy mix evolves.
The paper outlines potential benefits of implementing capacity markets in India, including improved investment signals for flexible generation and storage, assurance of resource adequacy during peak demand periods, enhanced grid reliability, and increased renewable energy integration. Additionally, capacity markets could promote investments in battery storage and other balancing resources. Critics, however, caution that capacity payments might distort markets, raise consumer costs, and prolong the operation of inefficient thermal assets.
While capacity markets are not expected to be implemented in India immediately, they are emerging on the horizon, signifying a significant shift in the energy landscape.
Published on May 11, 2026.
