The supply curve of a capacity market represents the aggregated bids of the suppliers of capacity. Different suppliers’ bids indicate their differing opportunity costs of incurring capacity obligations. Existing suppliers with firm plans to continue operating often bid at a price of zero, indicating that they are price-takers willing to accept a capacity obligation for any positive price. New suppliers and existing suppliers that are considering exiting the market, however, tend to bid at a non-zero price representing the additional revenue – that is, beyond the revenue they expect to earn from the energy and ancillary services markets – they need to receive to be able to operate without losing money.

For bidding to be possible, however, the object of the bidding – the capacity product – must first be defined. Defining the capacity product includes specifying how capacity is to be counted. This has turned out to be quite complicated. Centralized capacity markets are based on the premise that capacity is fungible, which allows a uniform capacity product to be traded in the market. In reality, however, different capacity resources make different contributions to overall system capacity. Factors such as the timing of generation and location of capacity are important. Regional transmission organizations (RTOs) operating capacity markets therefore must constantly balance two competing considerations that together constitute a complexity dilemma – creating a unified market that maximizes competition and minimizes transaction costs, versus creating a market that recognizes the different attributes of capacity resources.