The impacts of demand response participation in capacity markets. ESRI Research Bulletin 2019/10

Electricity demand varies over the course of a day or a year, with very high levels of electricity demand being seen for only a few hours per year. However, there must be sufficient electricity generation installed on the system to meet the total demand at these few hours per year, in order to avoid blackouts or brownouts, where electricity supply is disconnected for all or some customers, respectively. As electricity generation from variable renewable sources, such as wind and solar, increases, electricity market revenues decrease, which renders conventional generators less profitable. In order to ensure that there is sufficient conventional generation available to meet demand at the hours of highest demand per year, a separate market payment is made to generators, called a capacity payment