CERC Proposes Capacity Market Framework To Strengthen India’s Power Sector Reliability

The Staff of the Central Electricity Regulatory Commission (CERC) released a discussion paper in April 2026 proposing the introduction of a Capacity Market in India’s electricity sector. The proposal is aimed at improving long-term resource adequacy, which refers to the power system’s ability to meet growing electricity demand reliably at all times. The paper comes at a time when India’s power demand is increasing rapidly due to industrial growth, urbanization, renewable energy expansion, and rising electricity consumption across states.

According to the paper, India currently relies heavily on long-term Power Purchase Agreements (PPAs), which already work in a way similar to capacity contracts. However, the CERC staff believes that the present system may not be enough in the future, especially when electricity markets alone are unable to provide sufficient revenue for power plants to recover their fixed costs. This challenge is commonly known as the “missing money” problem in electricity markets.

The paper studies international capacity market models followed in countries such as Germany, the United Kingdom, and the United States. In these countries, generators are not only paid for the electricity they produce but also for being available during times of high demand or system stress. This system helps maintain grid reliability and encourages investments in new power generation capacity.

Based on these global examples, the CERC staff has proposed three possible market mechanisms for India. The first proposal is the Resource Adequacy Capacity Market. Under this system, distribution companies, or discoms, could procure long-term capacity through competitive bidding. One option suggests that discoms invite bids only for capacity charges for contracts lasting up to 15 years, with prices discovered through auctions. Another option recommends continuing the current total-cost bidding system but making market-based dispatch compulsory. A third “Residual” model proposes that a central agency conduct auctions on behalf of discoms facing shortages. To ensure accountability, the paper recommends penalties equal to 1.5 times the capacity charge if a provider fails to deliver during peak stress periods.

The second proposal is the Reserve Capacity Market, which aims to address the present shortage of reserve power in India. At present, the National Load Despatch Centre (NLDC) sometimes has to intervene directly to secure additional resources during periods of high electricity demand. Under the proposed framework, the NLDC would identify reserve shortages and conduct annual auctions for secondary and tertiary reserves. The paper describes this mechanism as a temporary safeguard until all states adopt a complete Resource Adequacy framework.

The third proposal is the creation of a Secondary Short-Term Capacity Market. This market would allow trading of existing surplus capacity for short periods ranging from one to three months. Through this system, discoms with excess contracted capacity could sell it to other discoms facing shortages. The paper states that this would improve efficiency and reduce dependence on isolated or “silo-based” contracts. The market would also include double-sided bidding and strict penalties for failure to supply power during stress periods.

The discussion paper also emphasizes a technology-neutral approach. Renewable energy projects, especially solar and wind developers, would be encouraged to participate by integrating battery energy storage systems. By linking contracts and dispatch mechanisms with the energy market, the CERC staff believes the proposed framework can improve resource utilization, stabilize electricity prices, and provide stronger financial confidence for investors planning new power projects. The commission is currently seeking stakeholder comments on all three proposed market structures before finalizing the framework for India’s future power sector development.