Integrating conventional hydropower into regional peak regulation markets and coordinating with provincial markets is key. A cross-provincial hydro-thermal ancillary service market mechanism addresses this. It considers hydropower feed-in tariffs along with the economic attributes and security-stability characteristics of different operational zones, proposing a hydropower deep peak regulation benchmark and opportunity cost model. Specifically for the Generation right replacement market, transactions are categorized based on the presence or absence of energy return for hydro-coal peak regulation. Considering significant deep regulation cost differences and regional variations in provincial market price caps, it defines separate trading products for hydropower and coal-fired deep peak regulation. It then proposes a “categorized and tiered price caps with separate clearing” mechanism, achieving priority clearing for hydropower and differentiated price caps for hydro versus coal units, while accommodating provincial price cap requirements and constructing compatible compensation and cost allocation mechanisms. Case verification shows the mechanism further harnesses hydropower deep regulation capability, coordinates hydro-coal services despite cost differences, enables market-based peak regulation optimization, enhances system regulation capability, reduces costs, and prevents regional costs exceeding provincial peak regulation price caps.