CERC Proposes New Capacity Market Framework to Address System Stress and Resource Adequacy

The Central Electricity Regulatory Commission (CERC) notified a staff paper titled ‘Capacity Market for Electricity in India’ on April 29, 2026. This regulatory proposal outlines a transition from the existing “energy-only” market toward a comprehensive framework designed to incentivize long-term resource adequacy through separate capacity payments. The primary objective is to address investment gaps for new generation capacity and ensure the power system maintains reliable supply during evolving periods of system stress.

The Problem Statement: Gaps in Current Long-Term PPAs

Under the prevailing regulatory landscape, India’s power supply is predominantly governed by long-term Power Purchase Agreements (PPAs). In this “energy-only” model, generators recover their fixed costs based on plant availability, while energy charges are recovered via a regulated formula based on scheduled power. Crucially, under these contracts, buyers (Distribution Companies or Discoms) retain scheduling rights.

The CERC identifies significant limitations in this model as renewable energy penetration increases and peak demand patterns shift. While current PPAs provide availability, they do not necessarily guarantee actual power supply during “hours of stress”—critical periods when the grid is under maximum pressure. The current framework often fails to provide sufficient investment signals for new dispatchable capacity, necessitating a shift toward market-based dispatch and pricing mechanisms to ensure resources are available when the system requires them most.

Proposed Implementation Mechanisms: Three Market Design Options

The staff paper proposes three distinct alternatives for a Resource Adequacy-linked market design. These frameworks are intended to be technology-agnostic, with the explicit expectation that renewable energy projects will participate by integrating storage solutions to offer firm capacity.

Option 1: Resource Adequacy (RA) Obligation Capacity Market

This option utilizes auction-based procurement to ensure Discoms meet their long-term resource requirements.

• Net-CONE Principle: Demand curves and market-clearing prices are determined using the Net Cost of New Entry (Net-CONE) principle, representing the cost of a new resource minus expected energy and ancillary service revenues.
• Long-Term Certainty: To encourage investment, this mechanism allows for contract durations of up to 15 years.
• Centralised Residual Market: A specific variant includes a centralised residual RA market, where a designated agency conducts auctions specifically for Discoms facing capacity shortfalls.

Option 2: Reserve Capacity Market

This framework focuses on addressing shortages in secondary and tertiary reserves, which are essential for grid stability during high intermittent renewable generation.

• Auction Process: The National Load Despatch Centre (NLDC) would conduct annual auctions for one-year capacity contracts.
• Operational Control: The NLDC would hold priority dispatch rights for these contracted reserves.
• Cost Allocation: Financial responsibility for these reserves would be allocated specifically to states with reserve deficits.

Option 3: Secondary Short-Term Capacity Market

Specifically targeting existing assets, this mechanism facilitates the trading of capacity on a monthly or quarterly basis (1–3 months) to assist Discoms with temporary deficits. The CERC is evaluating two bidding formats:

• Single-part Bids: Bidding based exclusively on a capacity charge.
• Two-part Bids: A more complex format where bids cover both a capacity charge and an energy charge.

Short-Term Trading and Reserve Mechanisms

The proposed secondary markets are designed to shift the sector toward market-based mechanisms, providing flexibility to the grid while ensuring reserves are accessible during peak stress.

Compliance, Penalties, and Stakeholder Timeline

The framework introduces rigorous operational constraints to ensure grid reliability. Contracted capacity providers are required to act as “price takers” during peak or stress hours identified by the NLDC. This requirement is specifically designed to limit “strategic behavior” and prevent market manipulation during periods of high demand.

Non-compliance with delivery obligations will carry significant financial consequences. The staff paper proposes penalties set at 1.5 times the discovered capacity charge for providers that fail to deliver power when requisitioned during stress periods.

Notice to Stakeholders

• Submission Deadline: All comments and suggestions regarding the proposals in the staff paper must be submitted by May 27, 2026.
• Status of the Paper: This staff paper reflects the views of the CERC staff and is currently non-binding on the Commission. It serves as a consultation document to facilitate discussion before formal regulations are drafted.