The Installed Capacity (ICAP) Demand Curve is one of the most consequential design elements in New York’s wholesale electricity markets. It helps establish the value of capacity, influences investment and retirement decisions across the state, and is an important component of the rates retail consumers pay for reliable electric service across the state. The NYISO’s Demand Curve Reset (DCR) Process and Methodology Improvements project is therefore among the most important market design efforts underway. The initial concept proposal presented at the August 18 ICAPWG marks a significant step toward the final design.
Luminary Energy shares the NYISO’s stated objectives of creating a durable, reliability-based framework and recognizes the considerable work behind the proposal. However, as currently structured, the NYISO’s proposal instead introduces complexities without fully achieving the project goals it set out to achieve. In this first post, in a series on the future direction of New York’s wholesale capacity market, Luminary offers its perspective on the core design elements and what they mean for New York consumers.
The Proposal at a Glance
The NYISO’s recommended design would retain the current proxy unit definition, use U.S. Energy Information Administration (EIA) capital cost data as the starting point for cost to build, incorporate residual value into the cost of new entry (CONE), establish the level of excess using planning or reliability metrics, inform zero-crossing points with Marginal Reliability Impact (MRI) curves, adopt a combined kinked demand curve, lower the maximum clearing price, and index key financial parameters annually. The reset period would remain at four years.
Key Design Concerns
Proxy unit definition. The proxy unit anchors the ICAP Demand Curve, and by extension what the market pays for installed capacity, so it should reflect a resource capable of meeting the full range of reliability services needed to keep the lights on in New York. This does not mean that the wholesale capacity market procures all reliability services, since revenues from other wholesale markets, including energy and ancillary services, are netted from the cost of new entry (CONE) of the proxy unit. Rather, the proxy unit technology selection should reflect the rational investment decision to meet New York’s reliability needs, based on the information provided through the NYISO’s planning processes and the investment signals produced by the NYISO’s wholesale market outcomes. Retaining the current definition continues to allow that anchor point to be set at the cost of a two-hour energy storage battery, a resource that cannot meet the NYISO’s firm fuel availability requirements and cannot meet the reliability needs being identified by the NYISO’s current planning studies. The two-hour energy storage battery also provides limited reliability value, since growing sustained reliability events that place the system at risk can last days or weeks. Pricing all capacity against that cost may produce outcomes that do not support the resources the grid depends on, leaving those needs to be met outside the market.
Combined kinked curve. An effective demand curve should send clear, predictable price signals. Although inputs have changed since the DCR process and sloped demand curve were established more than twenty years ago, the basic structure of the demand curve has not. The proposed two-kink structure, including a newly introduced retention point, has no precedent among other ISOs. Paired with a lower maximum clearing price, it risks muting the signal to retain and attract capacity precisely when the system needs investment most.
Residual value. Residual value estimates what the proxy unit is worth at the end of its amortization period and subtracts that amount from Gross CONE. Because the estimate depends largely on changing policies, private transactions and site-specific assumptions, these values can vary greatly and are based on a tremendous amount of uncertainty. Additionally, there are many accepted methods for determining residual value with no clear correct answer. Incorporating residual value into Gross CONE therefore introduces additional complexity and another set of assumptions that stakeholders will debate, argue, and possibly litigate since these values will be difficult to verify. Any potential for overestimating the residual value will flow directly into capacity prices and produce market prices that do not support the system’s reliability needs.
Alignment with actual costs. The choice of escalator and financial inputs matters less than the outcome. Gross CONE must keep pace with the actual cost of developing the proxy unit technology, and the escalation approaches used in past resets have consistently not achieved that result.
The NYISO’s Project Design Elements Heat Map, presented in August, is a useful reference point because it evaluated each design element against the project’s criteria. It rated the status quo proxy unit definition low on transparent and predictable outcomes, while an expanded definition that the NYISO does not recommend rated high on both reliability-based valuation and transparency. We encourage the NYISO and stakeholders to give that assessment greater weight as the design is finalized.
Implications for Consumers
Taken together, the proposal points toward a market that may sustain the existing fleet when conditions align but may no longer support competitive decisions to enter or exit the market. At best, the result is a retention-only market. At worst, it is a market in which new resources are built only under contract.
The distinction matters because competitive markets and contracts allocate costs in fundamentally different ways.
Capacity prices and investment signals. A frequent misconception is that stronger capacity prices create lasting revenue windfalls for existing generators as capacity margins tighten. In a competitive market that outcome does not persist because stronger prices attract new entry, driving prices and overall consumer costs back down. Stronger prices also encourage existing resources to invest in expansion and critical maintenance, while allowing new wind, solar, and storage resources to compete for investment without relying on state contracts. A windfall endures only where entry is blocked, and in New York, state policy has cooled merchant investment and slowed development of new, efficient generation. The NYISO made the same point in Power Trends 2026, observing that mandates which prioritize certain technologies or impose additional requirements can discourage investment in reliable, dispatchable generation and hasten existing-resource retirements, increasing consumer costs and reducing system reliability.
Mismatch between price and reliability need. Valuing capacity at the cost of a two-hour energy storage battery while expecting firm fuel resources to meet the system’s broader reliability needs creates a clear mismatch. It is comparable to pricing the entire vehicle market based on a compact hybrid while still needing heavy-duty trucks to be built. Firm fuel resources carry fuel, delivery, and contractual risks that the proxy unit does not, and the market does not currently account for those risks.
Importance of transparency. Competitive wholesale market prices are transparent. Load-serving entities and consumers can see them and manage exposure through primary and secondary markets with a degree of cost certainty. Contract costs operate differently. The costs of state-directed procurements, including renewable energy credit purchases and transmission contracts, pass directly through to customers with no market in which to hedge them. Those contracts are held by third parties such as New York State, and the consumers who pay for them are neither parties to the transactions nor able to fully understand the drivers of those contract costs. Without that transparency, there is no reliable way to determine whether the price paid reflects the value received.
Stronger price signals come at a near-term cost. A demand curve anchored to a proxy resource that is capable of meeting the system’s full spectrum of reliability services needs could raise capacity prices in the near term. In return, the market would send price signals that attract and retain the resources the grid relies on during periods of stress, and a greater share of the total cost of reliability would move into a transparent, hedgeable market and away from contract costs and risks that consumers can neither observe nor manage.
The same principle extends to how prices are determined. Parameters that drive capacity prices should be clearly documented and subject to stakeholder review, particularly as the market takes on greater responsibility for reliability in the years ahead. As the NYISO decides which parameters will be defined in the tariff and which will be determined during each DCR, we encourage it to favor transparency and codification.
Looking Ahead
The NYISO plans to return to the ICAPWG on September 30 to address stakeholder feedback, with the goal of a complete market design and corresponding tariff updates by the end of the year and a stakeholder vote targeted for the fourth quarter. The timing matters. With reliability margins tightening, load growing, and existing resources approaching retirement, the decisions made in this reset will shape whether New York can meet its reliability needs through the end of the decade and beyond. The objective is not higher costs; it is a reliable system with full visibility into the costs consumers bear.
In forthcoming posts, we will examine the NYISO’s effort to identify the appropriate price level, the Reliability Planning Process and its potential to expand contracting for needs the market should be meeting, and the broader set of actions shaping New York’s capacity market.
About Luminary Energy
Luminary Energy LLC provides advisory services to wholesale power generators and market participants in NYISO and ISO New England. To learn more about Luminary Energy’s services or to connect with a member of our team, contact us at contact@luminary.energy.