Do ISOs Control High Power Costs?
by Bob Shively, Enerdynamics President and Lead Facilitator
U.S. electricity consumers are finding themselves shocked by high bills. According to the Energy Information Administration (EIA), the average cost of electricity for residential customers in the U.S. increased by 7% between April 2025 and April 2026. In some locations, increases have been even more dramatic. For example, the average retail electric price in New Jersey increased by 17% over the same time period.
Part of these cost increases are due to utility spending on distribution systems. But another key factor is wholesale power costs. For instance, in New Jersey, wholesale power and generation costs make up roughly 40% to 45% of a standard residential electric bill.
Independent system operators (ISOs) now sit at the center of many U.S. power markets, so it is natural to ask whether they actually keep wholesale power costs from getting too high. The answer is “yes, somewhat, but indirectly.” ISOs do not regulate prices in the traditional sense, but they design and run the markets in ways that are intended to limit unjustified spikes and spread reliability costs more predictably over time.
An ISO's responsibilities
ISOs were created to run the transmission grid and administer competitive wholesale markets, not to promise cheap power. Their core responsibilities are to operate the bulk power system reliably in real time, provide open access to the transmission network, and run centralized markets for energy, ancillary services, and in some regions capacity. They do all this under federal oversight focused on “just and reasonable” rates, not “the lowest possible” rates.
This distinction matters. When fuel prices rise, demand is high, or new policy constraints increase costs, wholesale prices are expected to go up. The ISO is not supposed to suppress those fundamentals. Instead, it should ensure that prices reflect real system conditions, rather than market power, discrimination, or poor coordination.
Source: LCG Consulting Energy Online
How ISOs keep prices from being unreasonably high
Even though ISOs do not set prices outright, they strongly influence them through system operations and market rules.
First, ISOs use economic dispatch and locational marginal pricing (LMP). Generators submit offers, and the ISO chooses the least‑cost combination of units that can meet demand and reserve requirements while respecting transmission and reliability limits. The marginal unit at each location sets the price. This coordinated, system‑wide dispatch minimizes total production cost for the existing fleet, which tends to keep prices lower than they would be under less coordinated bilateral trading.
Second, ISOs design and enforce market power mitigation measures. In constrained areas or tight system conditions, a few generators might otherwise be able to push prices well above competitive levels. To prevent this, ISOs apply rules such as offer caps for pivotal suppliers or tests that compare offers to cost benchmarks. The goal is not to eliminate high prices, but to distinguish between legitimate scarcity pricing and abuse.
Third, ISOs promote transparency and consistent bidding rules. Standardized products, clear day‑ahead and real‑time timelines, and public information about system conditions help more efficient resources compete effectively. This reduces the frictions and information gaps that can lead to unnecessarily high costs.
The role of price caps
ISO energy markets have a “hard” cap on how high energy prices can go in both day‑ahead and real‑time markets, usually at a relatively high level in the thousands of dollars per megawatt‑hour. There are also caps that limit the prices generators can offer, with higher offers allowed only if they can provide documented costs.
These caps serve as guardrails. They prevent prices from becoming literally unbounded during system stress or technical failures, while still allowing prices to rise high enough to signal scarcity. In very tight conditions, prices can still be extremely high, but they remain within an agreed‑upon envelope. Scarcity pricing rules and adders, which kick in when reserves are low, are designed to reflect the value of reliability while staying under the cap.
From a cost‑control perspective, this means ISOs will not stop prices from rising during genuine scarcity. Still, they do prevent extreme, uncontrolled spikes that go beyond what the system’s costs and reliability needs can justify.
ISO Price Caps
| ISO |
Bid cap
(without justification of higher costs) |
Hard price cap
|
| PJM |
$1000/MWh |
$2000/MWh |
| MISO |
$1000/MWh |
$2000/MWh |
| SPP |
$1000/MWh |
$2000/MWh |
| NYISO |
$1000/MWh |
$2000/MWh |
| ISO-NE |
$1000/MWh |
$2000/MWh |
| CAISO |
$1000/MWh |
$2000/MWh |
| ERCOT* |
$2000/MWh |
$5000/MWh |
*ERCOT rules differ from the other ISOs, but this is generally reflective of ERCOT's caps
Capacity markets and long‑run costs
Price caps raise a natural concern: if energy prices are capped, will the market still provide enough incentive to build and maintain capacity? To address this, many ISOs use capacity markets or other formal resource adequacy mechanisms.
In these constructs, resources are paid not just for the energy they produce, but for being available to meet peak demand and reliability standards years in advance. This has two key effects. First, it helps ensure that generators recover their fixed costs and stay in the market, even if energy prices alone would be too volatile or too low on average. Second, it reduces reliance on extremely high spot prices as the only signal for new investment and reliability.
In practice, this means some of the cost of reliability is collected more steadily through capacity payments rather than through rare but massive energy price spikes. Total system cost is not magically reduced — reliability still has to be paid for — but the way those costs show up in wholesale prices is more predictable and less extreme.
So, do ISOs keep wholesale prices from getting too high?
ISOs do not guarantee low power prices, and they do not override the fundamentals of fuel costs, supply and demand, or policy. What they do is minimize production cost for the existing fleet, curb market power and manipulation, cap prices within reason, and use capacity constructs to ensure reliability without depending solely on unbounded scarcity pricing.
Taken together, those mechanisms do not prevent high prices when the system is genuinely tight, but they do keep wholesale power costs from becoming arbitrarily or unjustifiably high compared with what a well‑functioning competitive system should produce.
| ISO/RTO |
Soft Cap |
Hard Cap/Scarcity Cap |
|
|
|
|
|
| PJM |
$1,000/MWh |
$2,000/MWh |
|
| MISO |
$1,000/MWh |
$2,000/MWh |
|
| SPP |
$1,000/MWh |
$2,000/MWh |
|
| NYISO |
$1,000/MWh |
$2,000/MWh |
|
| ISO-NE |
$1,000/MWh |
$2,000/MWh |
|
| CAISO |
$1,000/MWh |
$2,000/MWh |
Market-based energy offers have an offer cap of $1,000 per MWh, California ISO subject to local market power mitigation; verified cost-based energy offers between $1,000/MWh and $2,000/MWh are eligible to set merit order and market prices under Order 831. California ISO As of August 2024, some Default Energy Bid categories were raised from a $1,000 to a $2,000/MWh cap. |
| ERCOT |
$2,000/MWh (LCAP) |
$5,000/MWh (HCAP) |
The outlier. ERCOT is energy-only (no capacity market) and uses a System-Wide Offer Cap (SWCAP) that toggles between the Low Cap of $2,000/MWh and High Cap of $5,000/MWh. Texas The HCAP was lowered from $9,000/MWh to $5,000/MWh effective January 2022. S&P Global Commodity Insights The cap resets to HCAP each January 1 and drops to LCAP once cumulative "peaker net margin" hits a threshold (3x the cost of new entry). Separately, ERCOT's new real-time market design (RTC+B, launched December 2025) introduced a distinct real-time system-wide offer cap of $2,000/MWh, while the day-ahead cap stays at $5,000/MWh. Ainvest There's also an Emergency Pricing Program that can drop the cap to $2,000/MWh (ECAP) if $5,000/MWh persists for 12 hours in a rolling 24-hour window. |
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