Locational Electricity Capacity Markets: Alternatives to Restore the Missing Signals

In the absence of a properly functioning electricity demand side, well-designed capacity payment mechanisms hold more promise for signaling the value of capacity than non-CPM alternatives. Locational CPMs that rely on market-based principles, such as forward capacity auctions, are superior to cost-based payments directed to specific must-run generators, as CPMs at least provide a meaningful price signal about the economic value of resources to potential investors.