Abstract: To overcome the difficulty in designing price cap for regulation of electricity market,a novel model,dynamic price capping model,was proposed based on British RPI(retail price index),American ROR(rate of return) and PCM(profit capping model).The determination of profit factor and the incentive mechanism for new and existing power plants were discussed,and it is proved that the model can make the investment return fair.The new model not only provides a solution to suppressing the price spikes effectively,but also is an incentive for power plants to raise their efficiency and for the electricity market to attract investments.