The Central Electricity Regulatory Commission (CERC) has released a staff paper outlining a framework for introducing capacity markets in India to address gaps in electricity resource adequacy, reserve availability, and short-term market efficiency.

Stakeholders can submit their comments by May 27, 2026.

Rethinking Capacity Procurement in India

India’s current system relies on long-term power purchase agreements that serve as capacity contracts. These agreements ensure recovery of fixed costs based on declared availability, while buyers retain scheduling rights, and energy charges are recovered under a regulated mechanism. The paper states that such contracts ensure the availability of generation capacity, but not necessarily or mandatorily during periods of system stress.

The paper examines alternatives that depart from this structure by allocating risks between buyers and sellers and indexing capacity contract terms, dispatch, and pricing to the energy market. The objective is to ensure capacity is available when the system requires it, particularly during periods of high demand or contingency conditions.

Global Experience and Design Features

The paper reviews international models across the U.S., UK, and Germany. These systems introduce capacity mechanisms alongside energy markets to ensure long-term resource adequacy, address the “missing money” problem, and support investment in generation capacity.

Common design elements across different models include auction-based procurement, capacity obligations on load-serving entities in some frameworks, centralized procurement in others, and penalties for non-fulfillment of obligations. The paper presents these as variants rather than uniform features across all markets.

Capacity Market Options for Resource Adequacy

The paper proposes three options for integrating capacity markets into India’s resource adequacy framework, under which discoms remain responsible for ensuring sufficient capacity.

Under the first option, distribution companies (DISCOMs) procure capacity through auctions based only on capacity charges. The demand curve may be drawn on a net-cost-of-new-entry basis, and the market-clearing capacity price would be determined at the intersection of demand and supply. Both generators and DISCOMs would participate in day-ahead and real-time energy markets. To ensure access to contracted capacity, the DISCOM’s demand curve for that capacity may be set slightly above the price cap, though the paper notes this could raise the market-clearing price. Capacity providers would be required to participate during peak or stress periods identified by the National Load Despatch Centre and bid as price takers. Failure to clear would attract penalties of up to 1.5 times the discovered capacity charge.

The second option retains procurement based on total cost, including both fixed and variable components, as in the current framework. However, dispatch shifts to the market. DISCOMs retain scheduling rights until the day-ahead market window but not dispatch rights thereafter. Both buyers and generators bid into the market, and after market clearing, bilateral settlement occurs based on the difference between the market-clearing price and the contracted tariff. Similar obligations apply for participation during stress periods, with penalties for non-compliance.

The third option introduces a centralized mechanism for residual resource adequacy requirements. A central agency designated by the Ministry of Power would conduct auctions for capacity shortfalls identified after DISCOM-level procurement. Contracts for such capacity could extend from 10 to 15 years. For shorter-term deficits of one to three years, the paper proposes procurement via a secondary capacity market. As in other options, participation during stress periods would be mandatory, with penalties for failure.

Reserve Capacity Market

The paper identifies insufficient reserves in India’s system, particularly during solar hours when thermal plants operate at minimum levels and spare capacity is limited. While reserves are typically procured closer to real time in other markets, the paper notes that India’s current lack of adequate resource buffers necessitates transitional measures.

It proposes advanced procurement of secondary and tertiary reserves through annual auctions with one-year contracts. The National Load Despatch Centre would allocate reserve requirements under the grid code, identify state-wise shortfalls, and initiate centralized procurement.

Auction design would be based on a Net Cost of New Entry benchmark with an added margin to define the bid cap, and price discovery would follow a pay-as-cleared approach. Capacity providers could supply reserves, remain on standby, or participate in energy markets depending on system requirements.

Reserve-deficient states would bear costs for capacity charges, while energy and compensation payments would be settled through the Deviation Settlement Mechanism and the Ancillary Services pool. Penalties for non-compliance would be set at 1.5 times the capacity charge plus the ancillary services price.

Short-Term Capacity Market

The paper notes that India’s existing short-term markets are energy-only and do not guarantee visibility or availability of capacity. This can result in supply shortages in the market even when contracted capacity exists outside it.

To address this, it proposes a secondary capacity market to trade existing contracted capacity for short durations. Auctions could be conducted periodically, including monthly and three-month contracts.

Two design options are proposed. The first uses a single-part bid for the capacity charge with uniform price discovery. The second uses a two-part bid structure combining capacity and energy charges. Eligible participants include discoms, generators, and traders on both the supply and demand sides.

These mechanisms aim to improve utilization and visibility of existing capacity and address imbalances between surplus and deficit regions.

Integration of Storage and Renewable Resources

The paper states that renewable generators may participate in capacity markets by firming output with energy storage systems. It recommends a technology-neutral framework that allows thermal, renewable, storage, and demand-response resources to compete, subject to performance requirements.

Various state electricity regulatory commissions have proposed broader resource adequacy frameworks that require DISCOMs to forecast demand and secure sufficient capacity to meet peak demand. The CERC staff paper builds on these principles by proposing market-based mechanisms to strengthen reliability beyond traditional contracting structures.

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