Trend watch: Peaker plant replacement & capacity markets in 2026 — signals, winners, and red flags

Natural gas peaker plants, the fleet of fast-start turbines that utilities fire up during peak demand hours, are entering an accelerating phase of economic obsolescence. In PJM Interconnection's 2025/2026 capacity auction, clearing prices surged tenfold to $269.92 per megawatt-day, up from $28.92 the prior year, reflecting both tightening reserve margins and the growing cost of maintaining aging thermal assets. Yet even as capacity prices spike, battery storage systems are undercutting peakers on levelized cost in an expanding set of markets. BloombergNEF estimates that utility-scale battery storage (four-hour duration) reached a levelized cost of $92 per megawatt-hour in 2025, compared to $140 to $200 per megawatt-hour for gas peaker generation, a crossover that is redrawing competitive boundaries across every major grid.

Why It Matters

The United States operates approximately 120 GW of gas peaker capacity, representing roughly 10% of total installed generation but running only 5 to 15% of the time. These plants exist for a singular purpose: meeting the highest-demand hours of the year, typically summer afternoon peaks driven by air conditioning load. The economics have historically been simple: peakers earn most of their revenue through capacity payments (compensation for being available) rather than energy sales, making them the most expensive electrons on the grid when measured per kilowatt-hour delivered.

Three converging forces are disrupting this model. First, battery storage costs have declined 90% since 2010, with four-hour lithium-ion systems now capable of displacing 60 to 85% of peaker dispatch hours in most markets. The California Public Utilities Commission's landmark 2019 decision to replace three Calpine gas plants with 567 MW of battery storage established the template that other jurisdictions are now following. As of early 2026, over 25 GW of battery storage has been deployed in the US, with another 40 GW in interconnection queues specifically targeting peaker replacement applications.

Second, demand response and virtual power plants are aggregating distributed flexibility at costs well below peaker generation. FERC Order 2222, which requires regional transmission organizations to allow distributed energy resource aggregations to participate in wholesale markets, has unlocked a new competitive resource class. Voltus, CPower, and Enel X now aggregate tens of thousands of commercial and industrial loads, offering dispatchable capacity at $30 to $80 per kilowatt-year, compared to $100 to $150 for gas peaker capacity payments in major markets.

Third, environmental regulations are tightening the operating envelope for gas peakers. The EPA's updated ozone and PM2.5 standards, finalized in 2024, disproportionately affect peaker plants concentrated in environmental justice communities. New York's Climate Leadership and Community Protection Act has mandated the retirement of all peaker plants in New York City's disadvantaged communities by 2030, affecting 28 facilities totaling over 6 GW. Similar legislation is advancing in New Jersey, Illinois, and California.

Key Concepts

Capacity Markets are organized procurement mechanisms through which grid operators secure commitments from generators, storage operators, and demand response providers to be available during peak demand periods. PJM, ISO-NE, and NYISO operate the largest US capacity markets, while the UK, Ireland, and several European markets maintain comparable structures. Capacity market design profoundly influences the pace of peaker replacement: markets that allow storage and demand response to compete on equal terms with thermal generation accelerate the transition, while those maintaining incumbent-favoring rules slow it.

Effective Load Carrying Capability (ELCC) measures the contribution of a resource to grid reliability, expressed as a percentage of its nameplate capacity. A gas peaker typically receives 95 to 100% ELCC because it can dispatch on demand. A four-hour battery storage system currently receives 50 to 85% ELCC depending on the market and penetration level, reflecting the reality that batteries cannot sustain output indefinitely during extended heat events. As battery penetration increases, ELCC values decline due to saturation effects, a dynamic that favors long-duration storage and demand response as complementary resources.

Dispatchable Emissions-Free Resources (DEFRs) encompass the portfolio of clean technologies capable of providing firm, on-demand power: battery storage, long-duration energy storage, green hydrogen combustion turbines, advanced geothermal, and aggregated demand response. The concept recognizes that replacing peakers requires not just energy but reliability services including frequency regulation, voltage support, and black start capability. No single DEFR matches the full operational profile of a gas peaker, but portfolios of complementary resources can replicate and exceed peaker functionality.

Peaker Plant Retirement Queue refers to the growing pipeline of announced retirements and replacements. According to the Sierra Club's Beyond Gas tracking database, over 15 GW of gas peaker retirements have been announced in the US through 2030, with battery storage or hybrid resources named as replacements in approximately 70% of cases. The retirement pipeline accelerated sharply in 2024 and 2025 as capacity market revenues failed to offset rising maintenance costs for aging turbines, many of which are 25 to 40 years old.

Signals to Watch

Bullish Signals for Clean Replacement

PJM Capacity Auction Price Signals: The 10x increase in PJM capacity clearing prices for 2025/2026 creates a paradox: higher prices temporarily improve peaker economics but simultaneously signal to storage developers that capacity revenues can support project finance. Battery developers are now bidding aggressively into future PJM auctions, with the 2026/2027 auction expected to see over 15 GW of new storage offers. If storage clears at scale, capacity prices will moderate and structurally undermine the peaker business case.

State-Level Peaker Phaseout Legislation: New York's Peaker Rule (6 NYCRR Part 222) requires 28 peaker plants in disadvantaged communities to meet stringent NOx emission limits by 2025, with full compliance by 2030, effectively mandating retirement for units that cannot economically retrofit. California's SB 1020 requires 90% clean electricity by 2035, creating a regulatory ceiling for gas generation. Illinois's Climate and Equitable Jobs Act targets 100% clean energy by 2045 with interim milestones that constrain peaker operations. These state actions are creating a rolling wave of retirements that market signals alone would not produce.

Long-Duration Energy Storage Commercialization: Form Energy's iron-air batteries (targeting $20 per kilowatt-hour for 100-hour duration), ESS Inc.'s iron flow batteries, and Eos Energy's zinc-based systems are approaching commercial deployment. Long-duration storage directly addresses the ELCC limitation of four-hour lithium-ion systems by providing multi-day backup capacity. Georgia Power's 15 MW/1,500 MWh Form Energy pilot, scheduled for operation in 2025, will provide the first utility-scale performance data for 100-hour storage in a capacity market context.

Red Flags and Risks

Interconnection Queue Congestion: LBNL data shows that the average time from interconnection request to commercial operation for storage projects in the US has grown to 5.1 years, with only 14% of projects in the queue ultimately reaching operation. If interconnection bottlenecks persist, planned peaker replacements will face delays that compromise grid reliability during the transition period. FERC Order 2023 reforms aim to accelerate queue processing, but implementation timelines extend to 2026 and beyond.

Capacity Market Design Bias: Several capacity market rules continue to favor thermal incumbents. PJM's Minimum Offer Price Rule (MOPR), while recently reformed, previously prevented subsidized clean resources from competing at market-clearing prices. ISO-NE's capacity market still applies higher performance penalties to intermittent and duration-limited resources. These design elements slow the pace of replacement even when storage is cost-competitive on a levelized basis.

Extreme Weather Stress Events: The Texas winter storms of February 2021 and the Pacific Northwest heat dome of June 2021 demonstrated that extreme weather can create sustained demand peaks lasting 72 to 120 hours, well beyond the duration capability of four-hour battery systems. These events have strengthened arguments for maintaining some thermal backup capacity and slowed peaker retirement decisions in regions with high climate risk exposure. The counterargument (that diversified clean portfolios with long-duration storage and demand response can match thermal reliability) remains largely theoretical pending commercial-scale demonstration.

Supply Chain Constraints for Battery Deployment: Lithium-ion battery cell supply for grid storage is competing with EV demand, and both sectors face upstream mineral constraints. CATL and BYD have prioritized EV customers, creating lead times of 12 to 18 months for utility-scale storage projects. Transformer shortages, affecting both storage and peaker interconnection, have added 6 to 12 months to project timelines. These constraints create risk that replacement capacity cannot be built fast enough to match retirement schedules.

Key Players

Established Leaders

• NextEra Energy -- Largest US renewable energy developer with 8+ GW of battery storage in operation or under construction. Aggressive peaker replacement strategy across Florida and Texas markets. FPL SolarTogether program pairs solar with four-hour storage to displace peaker dispatch.

• AES Corporation -- Pioneered utility-scale battery storage with its Fluence joint venture (with Siemens). 5+ GW of storage deployed globally. Leading peaker replacement projects in Southern California, Indiana, and Chile.

• Vistra Energy -- Operates the 1,680 MWh Moss Landing battery storage facility, the world's largest, on the site of a former gas plant in California. Demonstrating the direct conversion model from fossil peaker to battery asset.

• LSP (LS Power) -- Major competitive power and transmission company with 4+ GW of battery storage in development. Active bidder in PJM, ERCOT, and CAISO capacity markets with peaker-replacement storage projects.

Emerging Startups

• Form Energy -- Iron-air battery technology targeting 100-hour duration at $20/kWh. $800M+ in funding. Georgia Power and Xcel Energy pilot projects underway. If successful, eliminates the duration limitation argument for peaker retirement.

• Voltus -- Demand response aggregation platform coordinating 7+ GW of distributed flexibility across commercial and industrial loads. Competes directly with peaker capacity in PJM and ISO-NE markets at fraction of cost.

• Eos Energy -- Zinc-based aqueous battery technology for 3 to 12-hour duration applications. Manufacturing facility in Turtle Creek, Pennsylvania. Targeting peaker replacement with non-lithium chemistry that avoids supply chain constraints.

• Enchanted Rock -- Natural gas-powered microgrids and backup generation that bridge the transition from peakers to fully clean alternatives. Provides resilience services while enabling incremental peaker retirement.

Key Investors & Funders

• Brookfield Renewable -- $75B+ in renewable and transition assets globally. Active acquirer of peaker plants for conversion to storage sites, leveraging existing grid interconnection and land assets.

• BlackRock Infrastructure -- Major allocator to battery storage and grid modernization through its Global Infrastructure Partners acquisition. Climate Infrastructure Fund targets peaker replacement as a core thesis.

• US DOE Loan Programs Office -- Provided billions in conditional commitments to battery storage projects including $9.2B to PG&E for grid modernization and storage deployment.

Examples

1. Vistra Moss Landing (California): Vistra converted a retired natural gas power plant site into the world's largest battery energy storage system at 1,680 MWh (400 MW for four hours). The project demonstrated that existing fossil fuel sites offer ideal characteristics for storage deployment: grid interconnection already in place, permitting precedent established, and communities accustomed to industrial energy operations. Moss Landing participates in CAISO's resource adequacy and ancillary services markets, earning revenue streams that were previously captured by gas peakers. The facility has displaced an estimated 200,000 tonnes of CO2 annually by reducing gas peaker dispatch during evening peak hours.

2. New York Peaker Rule Compliance: Con Edison and NYPA have been systematically replacing peaker plants across New York City's environmental justice communities in response to the state's Part 222 regulation. The Ravenswood replacement project on the Queens waterfront exemplifies the approach: a 316 MW peaker complex is being phased down in favor of 400 MWh of battery storage combined with targeted demand response programs in surrounding neighborhoods. The project addresses both grid reliability and environmental justice, as the affected communities experience asthma hospitalization rates 2 to 3 times the citywide average. Early results show a 45% reduction in local NOx emissions during peak demand periods.

3. AES Alamitos (Southern California): AES replaced its 1950s-era Alamitos gas generating station in Long Beach with a 400 MW/1,600 MWh battery storage facility, one of the largest peaker-to-battery conversions globally. The project was commissioned in response to the CPUC's directive to procure clean alternatives following the Aliso Canyon gas leak. The Alamitos battery system participates in both resource adequacy procurement and the CAISO real-time energy market, providing the same grid services as the gas plant it replaced while eliminating 350,000+ tonnes of annual CO2 emissions and local air pollution affecting nearby communities in Long Beach.

Action Checklist

• Assess your organization's exposure to peaker capacity payments and energy procurement from gas peakers; quantify the share of electricity costs attributable to peak demand charges
• Evaluate battery storage and demand response alternatives for on-site peak demand reduction; four-hour lithium-ion systems now offer 3 to 7 year payback in most commercial rate structures
• Monitor capacity market auction results in your regional market (PJM, ISO-NE, NYISO, CAISO, ERCOT) as leading indicators of peaker economics and replacement pace
• Review state-level peaker phaseout legislation and environmental justice regulations that may affect facilities in your supply chain or operating territory
• Engage with demand response aggregators to monetize flexible loads; commercial and industrial facilities with interruptible processes can generate $30 to $80 per kilowatt-year in capacity revenue
• Evaluate long-duration energy storage technologies for applications requiring more than four hours of backup or peak shaving capability
• Assess grid interconnection timelines for planned storage projects; initiate interconnection requests 3 to 5 years ahead of target operational dates

FAQ

Q: How quickly are gas peaker plants being retired? A: The pace is accelerating. Over 15 GW of US peaker retirements have been announced through 2030, according to Sierra Club tracking data, up from roughly 5 GW of announced retirements as of 2022. The primary drivers are aging infrastructure (average US peaker age is 30+ years), rising maintenance costs, environmental regulations in urban areas, and the declining cost of battery storage alternatives. However, actual retirements lag announcements: interconnection delays, permitting challenges, and grid reliability reviews can extend timelines by 2 to 4 years beyond initial targets.

Q: Can battery storage fully replace gas peakers for grid reliability? A: Four-hour lithium-ion batteries can replace 60 to 85% of peaker dispatch hours in most markets, covering the daily evening peak that drives the majority of peaker utilization. For extended heat events lasting 3 to 5 days, current battery technology alone is insufficient, requiring complementary resources including demand response, long-duration storage, and potentially clean firm generation. The emerging portfolio approach (combining four-hour batteries, demand response, and long-duration storage) can match peaker reliability for all but the most extreme scenarios, but this portfolio has not yet been demonstrated at scale in a major capacity market.

Q: How do capacity market designs affect the pace of peaker replacement? A: Capacity market rules are among the strongest determinants of replacement pace. Markets that allow storage and demand response to compete on equal terms with thermal generation (such as CAISO's resource adequacy framework) see faster replacement. Markets with minimum offer price rules, performance penalties that disadvantage duration-limited resources, or multi-year capacity commitments that lock in incumbent generators slow the transition. FERC's ongoing capacity market reform proceedings will shape replacement economics for the next decade.

Q: What are the environmental justice implications of peaker plant operations? A: Gas peakers are disproportionately located in low-income communities and communities of color. A 2023 study by the Clean Energy Group found that 79% of New York City's peaker plants are in environmental justice communities. These plants emit nitrogen oxides, particulate matter, and volatile organic compounds during operation, contributing to elevated rates of asthma, cardiovascular disease, and respiratory illness. Replacing peakers with battery storage eliminates local air pollution while maintaining grid reliability, making peaker replacement one of the few clean energy transitions with immediate, localized health co-benefits.

Q: What should energy buyers consider when evaluating peaker replacement economics? A: Focus on total system cost rather than component costs. Compare the all-in cost of peaker capacity (capacity payment plus fuel plus emissions plus maintenance plus environmental compliance) against the all-in cost of replacement resources (battery capital plus degradation replacement plus demand response enrollment plus grid services revenue). In most US markets, the replacement portfolio is now cost-competitive or cheaper than continued peaker operation for assets older than 20 years. Request independent engineering assessments rather than relying on vendor projections, and model scenarios that include both moderate and extreme weather years.

Sources

• BloombergNEF. (2025). Battery Storage Market Outlook and Levelized Cost Benchmarks, Q1 2026. New York: Bloomberg LP.
• PJM Interconnection. (2025). 2025/2026 Base Residual Auction Results Report. Norristown, PA: PJM.
• Lawrence Berkeley National Laboratory. (2025). Queued Up: Characteristics of Power Plants Seeking Transmission Interconnection, 2024 Edition. Berkeley, CA: LBNL.
• Sierra Club. (2025). Beyond Gas: Tracking the Transition from Gas Peakers to Clean Energy. San Francisco, CA: Sierra Club.
• Clean Energy Group. (2023). Peaker Problem: Gas Plants in Environmental Justice Communities. Montpelier, VT: CEG.
• California Public Utilities Commission. (2025). Resource Adequacy Proceeding: Storage as Capacity Resource, Decision 25-01. San Francisco, CA: CPUC.
• US Energy Information Administration. (2025). Electric Power Annual 2024. Washington, DC: EIA.
• Form Energy. (2025). Iron-Air Battery Technology Overview and Commercial Deployment Update. Somerville, MA: Form Energy Inc.