The foundational model designed to keep the lights on for millions of Americans is fracturing under the immense weight of an electrified future it was never built to handle. A seismic shift is underway in the U.S. competitive electricity markets, framing the steady decline of the forward capacity market as the definitive end of an era for guaranteeing grid reliability. This urgent reform is driven by a powerful collision of forces: the exponential load growth from data centers fueling the AI economy, the complex integration of intermittent renewable energy, and a fog of deep forecasting uncertainty. This analysis dissects the systemic failure of the old model, examines the divergent paths being forged by grid operators ISO New England and PJM, analyzes expert-proposed solutions, and explores the uncertain future of ensuring resource adequacy for the next generation.
The Breakdown of the Forward Capacity Model
Data and Drivers of a Systemic Failure
The strain on the legacy market model is most visible in the startling statistics emerging from grid operators like PJM, the nation’s largest. Unprecedented load growth forecasts, largely driven by the explosive expansion of the AI economy and its insatiable demand for data centers, are shattering previous planning assumptions. This new, concentrated demand is placing a level of stress on the system that existing market mechanisms are proving incapable of managing, turning long-term projections into immediate crises.
This systemic failure is starkly illustrated by recent PJM capacity auctions. Despite clearing at record-high prices intended to incentivize new generation, the auctions have consistently failed to procure enough power to meet reliability targets. The most recent event resulted in a staggering 6-gigawatt shortfall, a clear signal that even extreme price signals are not translating into a secure supply. Compounding this issue are the massive backlogs in interconnection queues across the country, which physically prevent new wind, solar, and battery projects from connecting to the grid. This logistical bottleneck means that even when the market sends the right economic incentive, the system is unable to respond, rendering the model ineffective.
Case Studies in Market Disruption: New England vs. PJM
In a landmark move signaling a definitive break from the past, ISO New England has filed to completely dismantle its three-year forward capacity market by 2028. The grid operator plans to pivot to a “prompt” auction system, procuring capacity only for existing resources just a few months ahead of time. This strategic retreat effectively outsources the responsibility for incentivizing the construction of new power plants, a tacit admission that the forward market has failed in its primary objective of ensuring long-term resource adequacy in the modern era.
In stark contrast, PJM remains the last major market clinging to the forward model, positioning it as a real-time stress test of the legacy system under extreme pressure. While New England proactively stepped away from the challenge, PJM is grappling with an escalating crisis defined by unreliable forecasts, soaring costs for consumers, and immense political pressure from its diverse 13-state territory. The grid operator is caught in a difficult position, attempting to reform a failing system while simultaneously managing the very real-world consequences of its breakdown, from interconnection delays to resource shortfalls.
Expert Commentary on the Unraveling System
According to Abe Silverman of Johns Hopkins University, ISO New England’s decision is a “tacit admission” of the forward market’s failure and a strategic retreat from the political “firing line.” By abandoning the responsibility of sending long-term price signals, the ISO is extricating itself from the contentious process of justifying high electricity costs based on uncertain future needs, a problem currently plaguing PJM.
The core design flaw of the legacy model is its inefficiency, as highlighted by Brent Nelson of Ascend Analytics. The system forces grid operators to overpay the entire existing fleet of power plants simply to send a price signal high enough to incentivize the construction of a few new ones. This structure socializes the high cost of marginal new entry across all consumers, an increasingly untenable approach. This dynamic is pushing the market toward what Julia Hoos of Aurora Energy Research identifies as a potential “re-verticalization” trend, where utilities reclaim responsibility for long-term planning, effectively reversing decades of market liberalization.
This fundamental shift from procuring abstract capacity to ensuring tangible reliability introduces significant complexity. Margarita Patria of Charles River Associates notes that this transition is especially challenging without clear, established technical rules from federal regulators. Critical questions about how to credit new resources like co-located generation or verify the performance of flexible load remain unresolved. Attempting to reform the market before these foundational rules are in place creates a precarious environment where new designs may be built on an unstable regulatory foundation.
The Future Blueprint: A New Model for Resource Adequacy
The Proposed Two-Tiered Reliability Market
An emerging consensus points toward a two-tiered solution that decouples the compensation for existing resources from the complex and costly process of financing new ones. This bifurcated approach is designed to enhance both cost-efficiency and accountability, addressing the core weaknesses of the current single-market structure.
The first component of this new model is Tier One: The Prompt Reliability Market. This would function as a seasonal or prompt auction, similar to what ISO New England is proposing, focused exclusively on the existing generation fleet. The primary goal of this tier is to ensure near-term operational reliability at stable and predictable costs for ratepayers, removing the volatility associated with long-term forecasting. In contrast, Tier Two: The Policy-Driven Growth Engine would handle the financing of new generation—the “new steel in the ground”—outside the primary market. This would be achieved through targeted, long-term mechanisms such as state-sponsored solicitations for specific resource types, direct bilateral contracts between generators and large consumers, or other policy-driven procurement strategies.
The Uncharted Path: Challenges and Implications
As grid operators step back from long-term planning, the critical question becomes who will fill the resource adequacy void. In New England, the region’s history of state-level collaboration suggests that governments will likely work together to backstop new generation through long-term contracts. The political landscape in the larger and more diverse PJM territory presents a more complex challenge, where achieving consensus on a unified procurement strategy will be significantly more difficult.
This evolving framework carries a profound implication: the ability to directly allocate the high costs of new generation to the entities driving the demand. Instead of socializing the expense of building power plants to serve data centers across all consumers, this new model allows those costs to be borne directly by the large energy users themselves. However, this path forward is fraught with risk. The precariousness of reforming the market before foundational technical and regulatory questions are resolved cannot be overstated. Issues like crediting co-located resources and verifying flexible load must be settled to ensure any new market design is both effective and equitable.
Conclusion: Building the Grid for the Next Generation
The evidence has become undeniable: the forward capacity market, once the bedrock of grid reliability, is an obsolete tool for the modern energy landscape. This was confirmed by ISO New England’s strategic exit and is demonstrated daily by PJM’s ongoing struggle to manage the immense pressures of the energy transition and the rise of the AI-driven economy. A new paradigm is not just an option but a necessity.
The success of these reforms will be paramount to maintaining an affordable and reliable electricity supply for decades to come. The stakes are incredibly high, as the stability of the grid underpins both economic prosperity and the ambitious goals of decarbonization. An urgent and concerted collaboration between grid operators, state governments, and federal regulators is the required next step to design and implement a more resilient, efficient, and equitable market structure. The challenge is to build a system not for the grid of yesterday, but for the complex, dynamic, and demanding grid of tomorrow.Fixed version:
The foundational model designed to keep the lights on for millions of Americans is fracturing under the immense weight of an electrified future it was never built to handle. A seismic shift is underway in the U.S. competitive electricity markets, framing the steady decline of the forward capacity market as the definitive end of an era for guaranteeing grid reliability. This urgent reform is driven by a powerful collision of forces: the exponential load growth from data centers fueling the AI economy, the complex integration of intermittent renewable energy, and a fog of deep forecasting uncertainty. This analysis dissects the systemic failure of the old model, examines the divergent paths being forged by grid operators ISO New England and PJM, analyzes expert-proposed solutions, and explores the uncertain future of ensuring resource adequacy for the next generation.
The Breakdown of the Forward Capacity Model
Data and Drivers of a Systemic Failure
The strain on the legacy market model is most visible in the startling statistics emerging from grid operators like PJM, the nation’s largest. Unprecedented load growth forecasts, largely driven by the explosive expansion of the AI economy and its insatiable demand for data centers, are shattering previous planning assumptions. This new, concentrated demand is placing a level of stress on the system that existing market mechanisms are proving incapable of managing, turning long-term projections into immediate crises.
This systemic failure is starkly illustrated by recent PJM capacity auctions. Despite clearing at record-high prices intended to incentivize new generation, the auctions have consistently failed to procure enough power to meet reliability targets. The most recent event resulted in a staggering 6-gigawatt shortfall, a clear signal that even extreme price signals are not translating into a secure supply. Compounding this issue are the massive backlogs in interconnection queues across the country, which physically prevent new wind, solar, and battery projects from connecting to the grid. This logistical bottleneck means that even when the market sends the right economic incentive, the system is unable to respond, rendering the model ineffective.
Case Studies in Market Disruption: New England vs. PJM
In a landmark move signaling a definitive break from the past, ISO New England has filed to completely dismantle its three-year forward capacity market by 2028. The grid operator plans to pivot to a “prompt” auction system, procuring capacity only for existing resources just a few months ahead of time. This strategic retreat effectively outsources the responsibility for incentivizing the construction of new power plants, a tacit admission that the forward market has failed in its primary objective of ensuring long-term resource adequacy in the modern era.
In stark contrast, PJM remains the last major market clinging to the forward model, positioning it as a real-time stress test of the legacy system under extreme pressure. While New England proactively stepped away from the challenge, PJM is grappling with an escalating crisis defined by unreliable forecasts, soaring costs for consumers, and immense political pressure from its diverse 13-state territory. The grid operator is caught in a difficult position, attempting to reform a failing system while simultaneously managing the very real-world consequences of its breakdown, from interconnection delays to resource shortfalls.
Expert Commentary on the Unraveling System
According to Abe Silverman of Johns Hopkins University, ISO New England’s decision is a “tacit admission” of the forward market’s failure and a strategic retreat from the political “firing line.” By abandoning the responsibility of sending long-term price signals, the ISO is extricating itself from the contentious process of justifying high electricity costs based on uncertain future needs, a problem currently plaguing PJM.
The core design flaw of the legacy model is its inefficiency, as highlighted by Brent Nelson of Ascend Analytics. The system forces grid operators to overpay the entire existing fleet of power plants simply to send a price signal high enough to incentivize the construction of a few new ones. This structure socializes the high cost of marginal new entry across all consumers, an increasingly untenable approach. This dynamic is pushing the market toward what Julia Hoos of Aurora Energy Research identifies as a potential “re-verticalization” trend, where utilities reclaim responsibility for long-term planning, effectively reversing decades of market liberalization.
This fundamental shift from procuring abstract capacity to ensuring tangible reliability introduces significant complexity. Margarita Patria of Charles River Associates notes that this transition is especially challenging without clear, established technical rules from federal regulators. Critical questions about how to credit new resources like co-located generation or verify the performance of flexible load remain unresolved. Attempting to reform the market before these foundational rules are in place creates a precarious environment where new designs may be built on an unstable regulatory foundation.
The Future Blueprint: A New Model for Resource Adequacy
The Proposed Two-Tiered Reliability Market
An emerging consensus points toward a two-tiered solution that decouples the compensation for existing resources from the complex and costly process of financing new ones. This bifurcated approach is designed to enhance both cost-efficiency and accountability, addressing the core weaknesses of the current single-market structure.
The first component of this new model is Tier One: The Prompt Reliability Market. This would function as a seasonal or prompt auction, similar to what ISO New England is proposing, focused exclusively on the existing generation fleet. The primary goal of this tier is to ensure near-term operational reliability at stable and predictable costs for ratepayers, removing the volatility associated with long-term forecasting. In contrast, Tier Two: The Policy-Driven Growth Engine would handle the financing of new generation—the “new steel in the ground”—outside the primary market. This would be achieved through targeted, long-term mechanisms such as state-sponsored solicitations for specific resource types, direct bilateral contracts between generators and large consumers, or other policy-driven procurement strategies.
The Uncharted Path: Challenges and Implications
As grid operators step back from long-term planning, the critical question becomes who will fill the resource adequacy void. In New England, the region’s history of state-level collaboration suggests that governments will likely work together to backstop new generation through long-term contracts. The political landscape in the larger and more diverse PJM territory presents a more complex challenge, where achieving consensus on a unified procurement strategy will be significantly more difficult.
This evolving framework carries a profound implication: the ability to directly allocate the high costs of new generation to the entities driving the demand. Instead of socializing the expense of building power plants to serve data centers across all consumers, this new model allows those costs to be borne directly by the large energy users themselves. However, this path forward is fraught with risk. The precariousness of reforming the market before foundational technical and regulatory questions are resolved cannot be overstated. Issues like crediting co-located resources and verifying flexible load must be settled to ensure any new market design is both effective and equitable.
Conclusion: Building the Grid for the Next Generation
The evidence has become undeniable: the forward capacity market, once the bedrock of grid reliability, is an obsolete tool for the modern energy landscape. This was confirmed by ISO New England’s strategic exit and is demonstrated daily by PJM’s ongoing struggle to manage the immense pressures of the energy transition and the rise of the AI-driven economy. A new paradigm is not just an option but a necessity.
The success of these reforms will be paramount to maintaining an affordable and reliable electricity supply for decades to come. The stakes are incredibly high, as the stability of the grid underpins both economic prosperity and the ambitious goals of decarbonization. An urgent and concerted collaboration between grid operators, state governments, and federal regulators is the required next step to design and implement a more resilient, efficient, and equitable market structure. The challenge is to build a system not for the grid of yesterday, but for the complex, dynamic, and demanding grid of tomorrow.
