Capacity market reforms take shape as stakeholder discussions continue

In collaboration with stakeholders over the past several months, ISO New England has developed key elements of its Capacity Auction Reforms project. Market design discussions will continue as the ISO prepares to take its proposals to the Federal Energy Regulatory Commission (FERC) later this year.

The region’s capacity market provides payments to resources that accept obligations to supply electricity or curtail demand when called upon by the ISO. It is a key mechanism for ensuring the long-term reliability of the bulk electric system.

Last year, the ISO recommended reforming the capacity market to improve reliability and cost-efficiency as the region’s resource mix evolves. Major objectives are procuring capacity in a timelier manner and updating capacity accreditation methods to better align capacity with resource adequacy contributions.

If accepted by FERC, the reforms would take effect for the capacity commitment period beginning June 1, 2028.

The first sealed-bid auction under the new system would take place one to two months before that date. This “prompt” auction schedule is a significant change from the current system, where auctions have been held more than three years before the corresponding commitment period. The shorter timeline allows auction parameters to be informed by more accurate information about the region’s resource capabilities and expected demand for wholesale electricity.

While the current system procures capacity annually, the ISO has proposed moving to two commitment periods per year to better address the distinct reliability challenges of summer and winter. The proposed commitment periods extend from May 1 to Oct. 30 (summer) and Nov. 1 to April 30 (winter). Separate auctions would be conducted for each season.

Changing the way resources enter and exit the capacity market is another important element of the reforms.

The current process, known as retirement, requires a resource to notify the ISO more than four years before it plans to exit the capacity market. The ISO’s proposed new process, called deactivation, shortens the notification period to two years. Review processes would remain in place to deter attempts at market manipulation and safeguard against deactivations that jeopardize transmission security. The shorter notification period balances the time needed for the ISO to complete these reviews and for market participants to react to deactivation decisions.

New resources would be required to demonstrate that they are operational before participating in the auction. This will eliminate the potential for participation by “phantom” resources unable to meet their capacity supply obligations. All resources in the capacity market will continue to be subject to the ISO’s Pay-for-Performance rules, where resources that underperform during scarcity conditions must compensate resources that overperform.

Updated accreditation standards will determine how much capacity each resource may offer into the market. Those standards remain in development at the ISO, and proposals will be presented to stakeholders beginning later this year.

The ISO anticipates proposing its reforms to FERC in two batches. The first filing, addressing the deactivation process and the “prompt” aspects of the auction schedule, is targeted for the fourth quarter of 2025. Resource accreditation and the seasonal aspects of the auction schedule would be addressed in a second filing planned for the fourth quarter of 2026.

Detailed information about the ISO’s proposals is contained in a series of presentations to New England Power Pool committees. A summary of the proposals, with links to presentation materials, is available on the ISO New England website.