CERC’s Proposed Capacity Market Framework: A Step Towards Strengthening India’s Power Sector

In April 2026, the Central Electricity Regulatory Commission (CERC) released a Staff Paper for stakeholder consultation on the introduction of a Capacity Market framework. The initiative comes at a time when India is witnessing a steady rise in electricity demand and transitioning towards a cleaner energy mix.

Several factors are driving this surge in demand, making round-the-clock electricity availability a major regulatory and operational challenge:

• Industrial growth
• Urbanisation
• Electrification
• Increasing integration of renewable energy sources

The Missing Money Problem

Traditionally, India’s power sector has relied on long-term Power Purchase Agreements (PPAs), under which generating companies recover their costs through fixed and energy charges.

However, with the growing share of renewable energy and market-based power transactions, concerns have emerged regarding the ability of generators to recover fixed costs solely through energy sales. This issue, often referred to as the “missing money problem,” may discourage future investments in generation capacity and affect long-term supply reliability.

Capacity Market as a Solution

To address these concerns, the CERC Staff Paper explores the creation of a Capacity Market. Under this model, power generators would be compensated not only for the electricity supplied but also for maintaining available capacity during periods of high demand or grid stress.

The paper examines capacity market mechanisms adopted in several international jurisdictions and evaluates their relevance in the Indian context.

Proposed Market Structures

The Staff Paper outlines three potential market structures for implementing the capacity framework in India.

Resource Adequacy Capacity Market

Under this structure, distribution companies (discoms) would procure long-term capacity through competitive bidding mechanisms, ensuring adequate resources are available to meet projected demand.

Reserve Capacity Market

This model is aimed at addressing shortages in reserve power. It would enable the National Load Despatch Centre (NLDC) to procure reserves through annual auctions.

Secondary Short-Term Capacity Market

This structure would allow discoms to trade surplus contracted capacity with other entities facing short-term shortages, adding flexibility to the overall market.

Technology-Neutral Approach

A notable feature of the proposal is its technology-neutral approach. The framework envisages participation from a broad range of resources, including renewable energy projects integrated with Battery Energy Storage Systems (BESS).

This design supports India’s clean energy transition while maintaining grid stability.

Outlook and Significance

The proposed Capacity Market framework represents an important step in rethinking India’s electricity market design. By focusing on resource adequacy, reserve availability, and market-based capacity procurement, the framework seeks to strengthen grid reliability and create greater investment certainty for power sector stakeholders.

If implemented effectively, it could play a crucial role in supporting India’s growing energy requirements while facilitating the integration of renewable energy into a more resilient and reliable power system.

Last Updated on 18 June, 2026