Explainer: Why does New England have wholesale electricity markets?

For a quarter-century, the region has gotten the electricity it depends on through wholesale markets administered by ISO New England. The markets allow the power system to operate reliably and cost-effectively today while also driving investment in the infrastructure of tomorrow.

But how did we get here? And where is the region headed? Below are some frequently asked questions about the markets.

What came before the wholesale markets?

Before market restructuring in the late 1990s, New England’s electric industry consisted largely of vertically integrated utilities that generated, transmitted, and distributed electricity as regulated monopolies. These companies recovered their costs through rates paid by customers.

Federal and state policymakers grew concerned that this framework limited innovation and exposed consumers to the financial risks of unwise investments. In response, New England adopted competitive, technology-neutral wholesale markets in which privately developed resources would compete to provide reliable electricity at the lowest cost. ISO New England began administering the region’s restructured wholesale markets in 1999.

What are the benefits of competitive markets?

Markets are the key mechanism for cost-effectively maintaining a reliable electric system.

A competitive marketplace with many buyers and sellers encourages efficiency and investment in new technologies. The markets are designed to select the least expensive resources to meet electricity needs while providing transparent price signals that indicate when and where additional investment may be needed.

Over time, competition has helped bring more efficient and lower-emitting resources onto the system. A competitive market also shifts the financial risk of developing new generation facilities from consumers to private investors.

Why are there multiple markets?

The power system must satisfy different needs across different time horizons. No single market can efficiently procure all the products and services required to keep the lights on every day and ensure the system remains reliable in the future.

The energy markets handle the buying and selling of electricity on a day-ahead and real-time basis, ensuring that supply matches demand at all times. The ancillary services markets procure specialized products, like frequency regulation, that support the safe and reliable operation of the grid in the short term. The capacity market looks further ahead by securing commitments from resources to be available to meet future electricity needs, helping ensure long-term reliability and driving investment in new resources to replace older ones exiting the market.

Who participates in the markets?

Today, approximately 600 buyers and sellers participate in the region’s wholesale markets, a significant increase from the roughly 40 private and municipal utilities operating in the region before restructuring.

Market participants include a diverse range of businesses. Sellers include power plant operators, owners of wind and solar farms, importers, and wholesale marketers. Buyers include retail electricity suppliers, investor-owned and municipal utilities, and large energy users like manufacturers and universities. Financial institutions buy and sell products in the markets as well.

The Participant Directory lists all entities registered with ISO New England, as well as those serving on advisory committees and subgroups.

How do we know whether the markets are working as intended?

ISO New England evaluates market performance through extensive analysis, monitoring, and public reporting. The ISO’s Internal Market Monitor (IMM) publishes monthly, quarterly, and annual reports that examine market outcomes and identify opportunities for improvement. The IMM has found that the markets generally produce competitive prices that reflect the cost of serving demand while supporting a reliable power system.

The IMM also monitors participant behavior to ensure compliance with market rules and deter market manipulation. An External Market Monitor conducts regular market assessments and reviews actions the IMM takes to mitigate anti-competitive behavior in the markets.

Why do market rules and structures sometimes change?

The electricity industry is constantly evolving as new technologies, consumer behaviors, and public policies emerge. To keep pace with these developments, ISO New England continuously evaluates market performance and updates rules, procedures, and software systems when necessary.

An example is the ongoing Capacity Auction Reforms key project. Its goals include improving power system reliability and cost-effectiveness as the region’s resource mix evolves.

Proposed market changes undergo extensive stakeholder review and approval by the Federal Energy Regulatory Commission before implementation.

How does public policy affect the markets?

Governments establish energy and environmental policies, including clean energy incentives, emissions-reduction requirements, and programs that support the development of specific resources. The wholesale markets provide competitive price signals and reliability mechanisms that help integrate those resources into the electric system.

Over the past two decades, emissions regulations and clean energy policies have worked alongside the markets to encourage cleaner generation. By making higher-emitting resources more expensive to operate and creating opportunities for lower-emitting technologies, these policies have influenced investment decisions across the region.

The markets help maintain reliability by providing revenue for resources and services that can respond when weather-dependent generation is unavailable. These may include generation, energy storage, demand response, and other services that help balance supply and demand.

Does ISO New England have any financial interest in the markets or market participants?

No. ISO New England is a nonprofit organization that is financially independent from the companies that participate in the markets. This independence is essential for ensuring that the markets are competitive and fair. The ISO is funded through fees on wholesale market transactions and transmission-related services, rather than through ownership of generation resources or participation in the markets themselves.