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ISO New England is redesigning its day-ahead ancillary services market formula after protests over high winter prices and a request from New Hampshire Governor Kelly Ayotte.

Ayotte (D) asked the grid operator on March 16 to work expeditiously toward reforms because day-ahead ancillary service costs “have greatly exceeded estimates, resulting in what could be almost a billion dollars of added expenses that further disadvantage New Hampshire and regional energy markets and ratepayers.”

The grid operator is developing proposals based in part on February recommendations from its internal market monitor, and plans to discuss them this month at the meetings of its markets and reliability committees.

The ISO anticipates the changes to be filed at the Federal Energy Regulatory Commission and to become effective in the third quarter.

Ayotte’s figure is difficult to verify. January payments to generators for day-ahead ancillary services alone exceeded $100 million, according to the internal market monitor. February payments fell to less than one quarter of that amount.

The day-ahead ancillary service strike price tracks closely with real time, on-peak locational marginal prices (LMP). Currently, the strike price is set equal to the expected real-time LMP plus $10/MWh.

In January, the average real-time LMP exceeded $150/MWh, while the average day-ahead ancillary services price approached $175/MWh. Both of those markets fell slightly in February on an average basis.

The January payments for day-ahead ancillary services were the most ever in the history of this specific service, which began in March 2025 to replace a forward reserve market.

The forward reserve market cost between $63 to $101 million per year over 2022 to 2024.

The internal market monitor estimated that the day-ahead ancillary service market would cost $140 million annually, based on 2019–2021 market data.

“The internal market monitor is clear that changes in market fundamentals alone do not account for the full magnitude of the overrun,” Ayotte said in her letter.

ISO-New England said cold weather, higher fuel prices, expected closeout (settlement) prices, real time hub volatility and offer costs contributed to the high ancillary service levels in December through February.

The internal market monitor said that although an estimate in a preliminary impact assessment was not intended to forecast future prices, it seemed to play a meaningful role in shaping stakeholder expectations.

“Variables like higher consumer demand, higher natural gas prices, a shift in the resource mix, and extended extreme cold have resulted in higher prices than initial models predicted,” the monitor said.

A February 4 memo from David Naughton, executive direct of the market monitor, to the NEPOOL markets committee added that “participation has been lower, and offer prices higher, than assumed in the impact assessment.”

This resulted in tighter market supply conditions, high cross-product opportunity costs, and ultimately a higher marginal cost of meeting both energy demand and operating reserve requirements.

How the Ancillary Service Market Works

The day-ahead ancillary services market has two parts. One part covers the difference when awarded supply is below real-time forecast load, called energy imbalance reserves.

The second part procures supply, called day-ahead flexible response services, to recover from source-loss contingencies.

The flexible response services are analogous to ten-minute spinning reserves, ten-minute non-spinning reserves and thirty-minute operating reserves.

The internal market monitor called its proposed changes “narrow but meaningful refinements to key input parameters.”

The first proposed change is an upward adjustment to the strike price formulation to better align it with the short-run marginal costs of generators providing the services, largely combustion turbines with some combined cycle generators.

The short-run marginal cost of these resources frequently exceeds the strike price, the monitor said. Higher real-time prices increase settlement costs without providing any additional incentive for the resource to produce in real time.

Generators cannot physically cover or hedge their day-ahead ancillary services positions, a frequent complaint against centralized power markets by gas-fired plant operators.

Suppliers may therefore reflect this settlement risk in higher offer prices or, in some cases, opt not to participate, the market monitor said, when the expected financial exposure is uneconomic.

The monitor added that consideration should also be given to incorporating a dynamic short-run marginal cost that adjusts with fuel input costs as a floor within the current Gaussian mixture model-derived strike price.

A Gaussian mixture model is a kind of probabilistic distribution algorithm.

The second proposed change is a downward adjustment to the forecast energy requirement to reflect the expected contribution of renewable generation. This would reduce the energy demand quantity by the difference in expected real-time production and cleared day-ahead awards of front-of-the-meter renewables.

The market monitor said it has not seen a shift in renewable resource participation levels in the day-ahead market since day-ahead ancillary services began.

The forecast energy requirement credit paid to energy resources ranged from 3.6% to 13.2% of the total day-ahead energy and ancillary service costs from March 2025 to February 2026. That highest proportion ever was in January 2026, but in February it fell to 6.3%.

The third proposed change is a review and potential downward adjustment to the non-performance factor included in the ten- and thirty-minute operating reserve requirements.

The ten-minute reserve requirement serves as an input to other reserve requirements. As a result, the monitor said that the non-performance factor affects all ten- and thirty-minute reserve requirements.

The ISO said there has been improved average performance among the fast-start fleet in response to post-contingency dispatch instructions, but improvements can be made. Some improvements stem from pay-for-performance payments during scarcity conditions starting in 2018, with escalating performance rates.

If adopted, the market monitor said that a downward adjustment to the non-performance factor is expected to place downward pressure on the ancillary service costs.

Cheryl Lafleur, chair of the board of directors of ISO New England, responded to Ayotte on March 26 that the day-ahead ancillary services market has increased the day-ahead commitment of long-lead-time generation in place of fast-start resources during periods of stressed system conditions.

instead of relying on supplemental commitments and uplift payments after the day-ahead market closes, Lafleur said that long-lead-time resources receive advance notice of expected operation and assume a financial obligation that strongly incentivizes performance.
Fast-start resources, often limited by fuel constraints, are freed to become reserves as a result, and these commitments increase the “overall bench strength” of both kinds of available resources, she said.