Energy Central How capacity markets broke—and what it takes to fix them
Nov 24, 2025
Christoph Graf, a Senior Economist at NYU's Institute for Policy Integrity, dives into the crisis surrounding capacity markets. He explores the effects of rising auction prices in PJM and questions if these markets can adapt to modern demands like data center growth and decarbonization efforts. Graf contrasts existing reliability models, suggests strategies to enhance grid performance, and advocates for innovations spurred by high prices. With a focus on practical steps for utilities, his insights shed light on balancing affordability and reliability in an evolving energy landscape.
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Why Capacity Markets Exist
- Capacity markets exist to correct a reliability externality created by restructured wholesale markets.
- They allocate long-term responsibility for reliability when no single utility bears full responsibility.
Focus On Total System Cost
- Consumers care about total bills, not whether costs show up in capacity or energy prices.
- Comparing systems requires a counterfactual view of total costs under different reliability mechanisms.
Market Design Changes Reliability
- Administrative design choices like PJM's demand curve, caps and floors shape both price and reliability outcomes.
- Artificial caps can cause over- or under-procurement of capacity and change the reliability bought.