FAQ: The Capacity Market & Demand Curve Reset, What You Need to Know

The NYISO capacity market ensures reliable, low-cost electricity is available to meet consumer needs. Economic modeling tools and analyses are used to determine the price level needed to 1) attract investments in new generation and 2) retain current supply resources to maintain reliability. Inflation and the cost of materials and labor factor significantly into the economic modeling.

The NYISO reliability rules require that we update the inputs that factor into the capacity market prices every four years to account for changing conditions. The process of updating the inputs is known as the “demand curve reset.” 

We began the detailed work necessary for a full review of all relevant and necessary information in February 2023. The process is conducted in an open, transparent manner with interested parties, including several state agencies and authorities, industry market participants and other stakeholders. The process culminates in the filing of proposed results with FERC in November 2024.

What is a capacity market?

The capacity market secures commitments from power suppliers to meet peak demand and energy reserve margins mandated by regulators and electric reliability oversight organizations. 

Stringent reliability requirements determine how much energy producing capability, or capacity, is needed to reduce the potential for outages when unforeseen events occur, such as transmission outages or hotter-than-expected weather. 

Peak demand in New York reached 33,956 MW in July 2013. The capacity market ensures enough generation is available to supply customers with the electricity they demand, even if peak demand occurs for just a few hours on one day of the year.

Prices within this market are informed by “demand curves,” which establish prices based on the relationship between supply of available capacity and prices at any given time. Higher supply generally leads to lower capacity prices.

How does the capacity market help maintain system reliability?

Some regional wholesale electricity markets have not established capacity markets, relying instead on energy-only markets. In an energy-only wholesale market, power generators only sell electricity and related ancillary services to buyers.

Energy-only markets tend to have more volatility in pricing, with much higher spikes, especially during times of peak demand. In recent years, Texas and California, which both lack structured capacity markets, have relied on consumer conservation notices and voltage reductions during extreme weather to meet peak demand.

A capacity market requires that suppliers commit to being available to provide energy to consumers when it’s needed. The New York capacity market procures adequate reserves of power to be available even when consumer demand is at its highest. 

What is different about this demand curve reset?

Every four years, the NYISO and its stakeholders are required to review factors that inform the demand curve. Factors include state and federal policy mandates, siting challenges, inflation, supply chain constraints, and the costs of building and operating various energy resources. 

Historically, fossil fueled generators have been chosen to serve as the basis for establishing New York’s capacity market demand curves. The technology used in setting each of the demand curves is commonly referred to as a “peaking plant” or “proxy unit.” New York law now requires the electric system to be emissions-free by 2040. New technologies, such as lithium-ion batteries, are now competitively priced and are expected to meet future emissions requirements. 

The generation technologies currently under consideration to anchor the demand curves include battery storage technologies and fossil fuel-based generation. These technologies meet the established requirements for technologies to be evaluated as viable candidates for establishing the demand curves. The evaluation of these technologies as part of the demand curve reset must also consider their cost and viability in the context of public policies and ability to be built in New York. 

The NYISO hires an independent consultant to provide an impartial analysis of the costs of building various technologies that could potentially be used to anchor the demand curves.

The demand curve reset is intended to encourage investment in new technologies and retain existing technologies as necessary to support reliability by ensuring sufficient capability is available to serve energy demand. Because of the future limitations of power sector emissions to meet the state’s climate goals, it is assumed that developers of fossil fuel generators would need to recover their investment costs in an expedited timeframe. 

Our current reset cycle is underway, with new demand curves resulting from this process slated to take effect on May 1, 2025. 

How will the demand curve reset impact wholesale energy prices?

Demand on the grid and individual energy consumption are the primary drivers of the figure at the bottom of a utility bill.

Wholesale costs typically make up less than half of the average consumer’s electric bill. Of the wholesale costs on a consumer’s bill, capacity expenses account for about one-third. 

What is the timeline of the current reset process?

The primary activities of the reset process will be conducted throughout 2024. NYISO will continue to engage with stakeholders and the independent consultant.

• May - The independent consultant presented preliminary results to stakeholders
• June/July - The independent consultant issued a draft report and stakeholders submitted written comments
• July - NYISO staff issued preliminary recommendations
• August - Stakeholders will have the ability to submit written comments on the preliminary recommendations
• September – NYISO staff issues final recommendations
• October - Stakeholders will have the opportunity to submit written comments and provide oral feedback to the NYISO Board of Directors 
• November - NYISO will file the proposed results of the reset process with FERC
• May 1, 2025 - subject to FERC’s approval, new demand curves go into effect 

Learn more

• Listen to our podcast, Ep. 34: How the Capacity Market Supports Electric System Reliability