Capacity Payments
Definition
A capacity payment is income for committing a resource to be available to supply power when the grid needs it most, whether or not it is called on to produce. It is usually priced per megawatt per day or month, unlike energy sales, which are paid per megawatt-hour delivered. FERC notes that four RTOs and ISOs, PJM, MISO, NYISO and ISO-NE, 'rely on centralized capacity markets to ensure resource adequacy'; California uses bilateral resource adequacy contracts instead.
Why it matters
Capacity revenue can be a large and relatively predictable part of a project's income once an auction has cleared or a contract is signed, but it is set auction by auction or contract by contract and depends on accreditation rules that change. Investors should check how many years of capacity revenue are locked in, at what price, on what accredited MW, and what is assumed after that.
Common misconceptions
- •A capacity payment is not paid on nameplate MW; accreditation reduces it.
- •A high recent auction price does not fix future prices; auctions reset each delivery year.
- •Capacity revenue comes with performance obligations and penalties for not delivering when called.
- •The label is only a starting point. Investor outcomes usually depend on the governing documents, cash-flow priority, valuation policy, disclosure quality, and manager discretion surrounding the term, not just the shorthand definition used in marketing materials.
Technical details
Worked example (illustrative, simplified)
A 100 MW four-hour battery in PJM, 2026/2027: 100 MW x 50% class rating = about 50 MW accredited.
50 MW x $329.17 per MW-day x 365 days = about $6.0 million for the delivery year.
2027/2028: 100 MW x 58% = 58 MW; 58 x $333.44 x 365 = about $7.1 million.
A 100 MW fixed-tilt solar plant at 8% would earn about $0.96 million at the 2026/2027 price.
Actual accreditation is resource-specific and performance penalties apply; figures are for illustration.
Auction context
The 2026/2027 auction's cleared supply times price was $16.1 billion, up 9.5% from $14.7 billion a year earlier, per PJM.
PJM notes that figure 'does not equate to a total cost to load' because hedged load is not exposed to auction prices.
How investors apply the term
Investors usually apply this term by tying the definition back to the controlling documents and then asking which cash flows, rights, restrictions, or valuation assumptions it changes. A useful review looks at the term alongside fees, leverage, liquidity, reporting frequency, and manager discretion rather than treating it as a standalone concept.
The practical diligence test is simple: identify who benefits if the assumption is wrong, who has control when conditions change, and what evidence the investor receives after closing. Terms that cannot be reconciled to documents, cash movements, and monitoring data should be treated as marketing shorthand until proven otherwise.
Frequently asked questions
- How are capacity payments different from energy sales?
- Capacity pays for availability; energy pays for output. A battery or gas plant can earn capacity revenue in a year in which it rarely runs, as long as it is available and performs when called. Energy revenue, by contrast, rises and falls with how much is produced and at what price.
- How much do capacity markets pay?
- It changes each auction. In PJM's 2026/2027 Base Residual Auction, 'all prices cleared at the cap ($329.17)' per MW-day, and FERC reports the 2027/2028 auction also cleared at its cap of $333.44 per MW-day.
- Does every MW of nameplate earn a capacity payment?
- No. Payments are on accredited capacity. In PJM a four-hour battery was rated at 50% for 2026/2027 and fixed-tilt solar at 8%; see the effective load carrying capability page.
- What are resource adequacy contracts?
- California's equivalent: load-serving entities buy capacity bilaterally to meet state requirements. SB Energy describes resource adequacy requirements as creating 'demand for capacity from renewable generators,' and Clearway sold resource adequacy from its El Segundo plant for 2026 to 2029 after its PPA ended.