Abstract: Capacity market is an important trading product for maintaining the future power balance. Foreign capacity markets such as PJM in the United States mainly solves the problems of the reliability of future capacity supply and the cost separation of capacity and energy. However, the problems of inaccurate capacity demand forecasting and difficulty in effective balance of power supply and demand remain unsolved. A capacity market mechanism is proposed in this paper with consideration of the interaction among market participants and virtual bidders. A market correction mechanism is established to eliminate the unbalanced forecasting deviation based on the interaction among market participants and the speculative arbitrage of virtual bidders. The proposed mechanism can fully mobilize the resources and wisdom of the whole society, and guide the long-term effective balance of power supply and demand to reduce market risks. The connection mechanism between the capacity market and the energy market is proposed in this paper, in which the asset utilization rate of energy market is considered as the index to measure the effective capacity of capacity market, so as to inhibit the impulse of market participants to exercise market power in energy market based on incentive compatibility approach.

Key words: capacity market, interaction, virtual bidder, effective capacity