The Internal Market Monitor weighed in on ISO-NE’s proposed capacity market overhaul at the NEPOOL Markets Committee meeting June 11, expressing support for increased flexibility around resource retirement notifications and recommending the elimination of the pivotal supplier test. 

The RTO is in a multiyear effort to drastically cut the time between capacity auctions and commitment periods, improve its capacity accreditation methodology and split each capacity commitment period into winter and summer seasons. It’s working with stakeholders on the detailed design of the “prompt” auction, which includes significant changes relating to resource retirements and market power mitigation. 

Historically, ISO-NE has processed resource retirements through the forward capacity market, requiring retirement notifications about four years prior to the capacity commitment period (CCP). In the transition to a prompt auction, ISO-NE plans to decouple the retirement process from the capacity auction. (See ISO-NE Introduces Proposed Resource Retirement Changes.) 

ISO-NE has proposed to require retirement notices two years prior to the applicable CCP. It has said this timeline would balance the need to give participants up-to-date market information with the need to provide ISO-NE enough time to pursue solutions to potential reliability issues created by retirements.   

The proposal has evolved in recent months, as ISO-NE initially proposed, and then walked back, a market power penalty intended to deter participants from retiring economic resources in an attempt to increase revenues for their remaining resources. (See ISO-NE Discusses Details of New Prompt Capacity Market.) 

At the MC meeting, David Naughton, executive director of market monitoring at ISO-NE, expressed support for the two-year notification timeline, saying it “reasonably balances reliability and efficient market goals.” 

Differing from ISO-NE’s current proposal, and echoing requests from multiple stakeholders at the prior MC meeting, Naughton recommended allowing resources to rescind deactivation notices “should the economic outlook for the resource materially improve.” 

ISO-NE has expressed concern that allowing revocable retirement notifications could allow participants to “fish” for out-of-market retentions and could undermine the market signal sent by retirements.  

“Low barriers to exit and re-entry in market design are particularly important in the context of uncertainty in demand growth, new entry timing and barriers to entry,” Naughton said. The IMM detailed this recommendation in its 2024 annual markets report, which encouraged “flexibility around the exit and potential re-entry of existing resources.”  

The report, released in May, noted that capacity prices in the region are “much lower” than the net cost of new entry, with low prices threatening to increase retirements of aging resources in the near-term. 

“Depending on the pace and cost of new resource development, it may prove more cost-effective for the market to procure existing resources that can be reactivated, rather than relying solely on new entry,” the IMM wrote in the report.  

Naughton advocated for a defined “revocation window” for retirement submissions and a clear process for determining whether changes in market conditions warrant rescinding the retirement request. He also recommended that ISO-NE eliminate the capital investment threshold for resource repowering, which would make it easier for retired resources to reenter the market.  

Market Power Mitigation

Regarding the mitigation of market power in resource retirements, Naughton said the IMM evaluated three potential approaches: implementing a market power charge, continuing the current framework of proxy supply offers and relying on referral to the FERC Office of Enforcement.  

He said the IMM prefers the market power charge approach, but said extending the status quo to the prompt auction format would be “adequate to safeguard consumers.” 

The market power charge approach, Naughton said, provides the “strongest deterrent to exercising market power” and would be more likely to deliver “efficient price formation for current and future auctions.” 

Continuing the practice of using proxy supply offers for resources that fail IMM conduct and benefits tests would protect customers from high prices in the year following an uneconomic exit but may not prevent impacts beyond that year, Naughton said.  

At the May MC meeting, ISO-NE said it remains interested in a market power charge in the long term but said it does not plan to pursue the mechanism in the first phase of its capacity auction reform project, citing concerns about unintended effects expressed by multiple sectors.  

To prevent market participants from exercising seller-side market power, the IMM has recommended that ISO-NE replace the existing pivotal supplier test with a “conduct and impact test framework.” 

Under the current rules, if a participant fails a pivotal supplier test and a conduct test, it is held to a binding price set by the IMM. The IMM wrote in its annual report that a conduct and impact framework would more accurately evaluate and more consistently mitigate market power. 

“While the market is currently long on capacity and the ability to unilaterally exercise market power is low, adopting an impact test is robust under all supply/demand conditions,” the IMM wrote, adding that as the balance of supply and demand tightens, reliance on a pivotal supplier test “could result in the over mitigation of resources.” 

Winter Markets Report

Also at the MC meeting, the IMM reported that wholesale market costs more than doubled in the past winter compared to the prior winter, increasing by about $2.4 billion. A mild winter in 2023/24, followed by the coldest average temperatures in decade in 2024/25, was the root cause of this dramatic price swing, said Dónal O’Sullivan of the IMM.  

Consistently cold weather caused high gas demand, which drove up energy market costs and increased reliance on oil generation and imports compared to the previous winter, O’Sullivan said. The markets performed well throughout the season and the region did not experience any scarcity conditions, in part due to the lack of extended stretches of extreme cold weather, he added. 

O’Sullivan noted that ISO-NE’s inventoried energy program (IEP), which compensated generators for maintaining stored firm fuel on-site over the past two winters, did not have a measurable effect on the region’s fuel storage levels. The program expired this year, and ISO-NE appears unlikely to revive it in the upcoming years. The program cost about $78 million for the past winter, similar to the cost in the previous winter.  

“The equivalent of 4,900 MW per hour of natural-gas-backed generation participated, although it is unclear whether these resources procured additional fuel as a result of their participation,” O’Sullivan said. “Oil replenishment was 50% lower than the year prior to IEP implementation, despite similar oil generation.”