When Electricity Markets Work as Designed, Investment Follows
This is how competitive electricity markets are supposed to work: consumer demand goes up, supply becomes tight, and prices rise, sending signals to attract investment in reliable resources where they are needed most on the grid.
So why, despite years of policy focused on energy development, is New York now facing tightening supply margins, rising costs, and growing reliability concerns?
The grid’s ongoing challenges showcase how decades of well-intentioned policies can over time, steer investment decisions away from market signals and toward mandates, subsidies, and other out-of-market actions.
These interventions have altered the incentives that drive private investment, making it more difficult to attract the broad range of energy resources New York needs to maintain a reliable and affordable grid.
Unintended consequences
Over the years, New York policymakers have often intervened to address challenges facing the electric system. Each intervention was designed to solve a pressing concern of its time. Collectively, however, they have increasingly shifted investment decisions away from market signals and toward policy preferences.
In the 1980s, New York adopted the “Six-Cent Law,” requiring utilities to purchase power from certain generators at a minimum rate of 6 cents per kilowatt-hour. The goal was to encourage development amid supply concerns. While the law helped spur new generation, many contracts required utilities to purchase electricity at above-market prices, contributing to significant financial strain and large rate increases. The law was eventually repealed.
Years later, concerns about emissions and environmental impacts led to policies promoting cleaner resources. Notably, the 2019 Climate Leadership and Community Protection Act (CLCPA) established ambitious clean-energy mandates supported by state-directed procurements and subsidies.
When the CLCPA became law, it seemed plausible that incentivizing clean resources could help keep pace with normal growth in electricity demand. Today, demand projections are growing faster than they have in decades due to data centers and the electrification of buildings and transportation. At the same time, aging infrastructure and increasingly volatile weather are placing additional strain on the grid.
Renewable resources are a critical component of New York’s energy future, but the CLCPA’s targets and timelines have significantly constrained investment in the fossil-fueled resources that may also be needed to support a reliable transition.
Planning studies indicate that clean-energy resources alone may not be sufficient to meet future demand while maintaining reliability under all system conditions. As the latest State Energy Plan notes, upgrades to existing fossil-fuel resources can play an important role in the transition, reducing emissions while supporting reliability.
The cost of distorting market signals
Competitive markets work best when investors can reasonably expect prices to reflect system needs. When an increasing share of generation receives revenue through state contracts and subsidies funded with ratepayer money, those signals weaken. Investors must consider not only market conditions, but also whether future policy programs will favor competing resources, making investment decisions less predictable over time.
The case of Long Island’s Shoreham nuclear plant illustrates the risk. The power plant was permitted and constructed in an era when utilities were guaranteed to recover their costs for investment in new generation. But after public sentiment and policy shifted, the plant was closed before producing a single megawatt of electricity, leaving customers to pay the costs of construction and decommissioning. In competitive markets, investors bear the consequences of such failed or cancelled projects.
The closure of Indian Point in 2021 illustrates a related challenge. While market conditions eventually encouraged investment in replacement capacity, developers faced years of uncertainty regarding future policies, environmental requirements, and resource preferences.
Over time, repeated interventions can leave customers paying for multiple layers of policy-driven investments while the market struggles to attract the resources needed to address emerging reliability concerns.
From the Six-Cent Law, to Shoreham, to Indian Point, to the CLCPA, a common theme emerges: well-intentioned policy decisions can sometimes weaken market incentives, increase costs, shift investment risks from developers to ratepayers, and make it more difficult to attract the resources needed to maintain reliability.