If you manage electricity costs for a commercial or industrial operation in New England, you’re already affected by something called the capacity market — even if you’ve never heard the term. It’s embedded in your supply rate, it contributes meaningfully to what you pay per kilowatt-hour, and it’s currently being redesigned in a way that will change how future electricity prices are structured.

Here’s what the capacity market is, why it matters to C&I buyers, and what the current reforms mean in practical terms.

What Is the Capacity Market?

ISO New England runs a Forward Capacity Market (FCM) — an annual auction that procures commitments from power generators to be available to produce electricity three years in advance. The purpose is grid reliability: ISO-NE needs to ensure that enough generation capacity will exist in the future to meet peak demand, even under stress conditions.

Generators, demand response providers, and energy storage resources bid into this auction. The auction clears at a single price — paid to all committed resources — and that cost is then allocated back to electricity customers in the region through their retail supply contracts or utility default service rates.

What Are C&I Buyers Currently Paying?

The most recent annual auction — FCA 16, covering the capacity commitment period June 2026 through May 2027 — cleared at $3.58 per kW-month. This is historically low, reflecting a period of excess capacity in the ISO-NE footprint as older plants remain online and new resources have entered the market.

For a commercial operation with 500 kW of peak demand, that translates to roughly $21,480 annually in capacity-related costs embedded in the supply rate — a significant line item that most business owners never see broken out on their bills.

The Reform: From Three-Year-Forward to Prompt Auctions

ISO-NE’s current capacity auction structure procures commitments three years in advance of the delivery year. FERC approved a major change — Capacity Auction Reform Phase 1 (CAR Phase 1) — in 2024. The reform shifts toward prompt capacity auctions held much closer to the delivery year, typically 12-18 months out rather than 36 months.

For retail electricity suppliers, this changes the hedging calculus significantly. A supplier currently building a fixed-rate product three years out can lock in capacity costs at FCA prices. Under the prompt auction structure, that certainty is reduced — suppliers will have less visibility into future capacity costs when they price long-term fixed-rate contracts.

What This Means for Commercial Buyers

• Fixed-rate contracts may carry wider uncertainty premiums in the 2026-2028 timeframe as the market transitions to prompt auctions. Suppliers will price some of that uncertainty into longer-term fixed rates.
• Lock in favorable rates now, while FCA 16 prices are at historically low levels. Capacity costs are expected to rise as older resources retire and the grid tightens. FCA 18 and beyond may clear at substantially higher prices.
• Watch for passthrough clauses in competitive supply contracts. As the auction structure transitions, some suppliers may shift to capacity cost passthrough provisions in new contracts. Understand what your contract includes before signing.

The Bigger Picture: Capacity Costs Are Rising

New England’s grid is undergoing a fundamental transition. Coal and oil generation is retiring. Nuclear retirements remain a risk. New natural gas capacity faces siting and permitting headwinds. The combination of retiring resources and constrained new entry points toward tighter capacity margins and higher clearing prices in future auctions. The current low-price environment is a window — not a new normal.

Contact Gridwealth Electric: Gridwealth Electric tracks ISO-NE market developments closely and provides market intelligence to our broker partners and commercial customers. Contact us at tford@gridwealth.com.