When winter arrives in New England, something happens in the energy markets. Natural gas prices, which ordinarily follow their own supply-and-demand logic, start to track oil prices. For most consumers, this makes no sense. Oil and natural gas are different fuels, extracted differently, transported differently, and priced on separate exchanges. And yet, every cold winter, they move in tandem.
Neel Somani, a researcher and former quantitative analyst at Citadel, has spent years pondering how markets encode incentives into price signals. His background in commodities trading gives him a rare lens for explaining energy market dynamics to a non-specialist audience. In a widely circulated video explainer, Neel Somani recently laid out the mechanics behind New England's winter energy pricing in terms that cut through the noise.
The Stack That Sets the Price
To understand why prices behave the way they do, you first have to know how electricity is generated and priced in New England. The region operates on what traders call a generation stack, a ranked sequence of power sources ordered by cost. At the cheapest end sit renewables, solar and wind, whose marginal cost of producing an additional unit of electricity is effectively zero. Above them sit nuclear generators, then natural-gas generators of varying efficiency, and finally, at the very top of the stack, oil generators.
"The price for power is based on the last megawatt of power that's produced," Somani explains. In other words, the electricity market does not average costs across generators. It prices the entire market based on the most expensive source currently required to meet demand. This is the marginal pricing model, a structure used by wholesale electricity markets across the United States and most of the developed world.
Under normal conditions, New England can meet its power needs without touching oil. Natural gas generators cover the load that renewables cannot, and prices stay within a reasonable range. The system is functional, if not cheap. But winter changes the equation entirely.
When Heating Competes with Power
New England winters are cold, and a considerable portion of the region's homes rely on natural gas for heat. When temperatures drop sharply, residential and commercial heating demand surges. "Natural gas has to be used to heat homes," Somani notes. "If you don't heat your home, then your pipes can freeze, and that's super expensive to fix." The demand for gas to warm buildings is, in economic terms, largely inelastic. Residents do not significantly reduce their heating use in response to price signals because the alternative, frozen pipes or dangerous indoor temperatures, is far worse.
This fixed demand creates a supply bottleneck. The same gas that would otherwise flow to natural gas power generators is now being diverted to furnaces and boilers across the region. Supply tightens, and at some point, there simply isn't enough gas to run both the heating systems and the generators at full capacity.
When that happens, grid operators have to work their way up the generation stack. They call on the oil generators, the emergency backup units that sit idle most of the year precisely because they are so expensive to run. And as soon as oil generators come online, they set the price for every megawatt in the market.
The Arbitrage That Drives Gas Prices Up
Here is where the incentive structure becomes particularly instructive for anyone thinking about governance, market design, or the behavior of rational actors in competitive systems.
When oil generators come online and set the power price high, natural gas generators suddenly find themselves in a highly profitable position. They are burning a cheaper fuel, natural gas, but selling electricity at the oil-set price. The margin between the cost of generating a megawatt from gas and the market price for that megawatt becomes substantial.
Natural gas suppliers recognize this immediately. As Neel puts it, if you are a natural gas salesman at Algonquin, the major New England gas hub, you know that your customers, the power generators, are making exceptional profits on every unit of gas they buy from you. That creates an obvious opportunity to raise your price.
"You're thinking that anyone you sell natural gas to is probably making a lot of money because they can put it in a natural gas generator, and they can get paid the oil price while only paying natural gas cost," Somani says. "So then it's in your interest to keep raising the natural gas price until it's basically the same cost to produce a megawatt of power from a natural gas unit as it is to produce a megawatt of power from an oil unit."
This is not collusion. It is not manipulation. It is rational market behavior. Sellers charge what buyers are willing to pay, and buyers are willing to pay up to the point where their margin disappears. The result is a natural gas price that rises until it reaches equilibrium with the oil-implied price of electricity.
"The natural gas sales guy is not going to charge any more, because if they charge more, then they're not going to sell all the natural gas," Somani adds. "But if they charge less, then they're leaving money on the table."
The market finds a precise clearing price, and that price is structurally linked to oil. This is not a coincidence or an anomaly. It is the predictable output of a well-functioning incentive system doing exactly what it is designed to do.
Lessons in Market Design and Leadership
For executives and policymakers considering energy markets, New England offers a direct governance lesson. Prices do not simply reflect costs. They reflect the rules, constraints, and incentive structures of the system in which they are generated. Change the rules, and you change the prices, but you may also change the behavior of every actor in the system in ways that are difficult to anticipate.
Somani has written and spoken extensively about how incentive systems shape outcomes in markets ranging from blockchain infrastructure to artificial intelligence governance. His analysis of energy markets reflects the same underlying framework he brings to technology: start with the mechanism, identify the rational actors, and trace the logic through to its conclusion. The outcome may be surprising on the surface, but it rarely defies explanation once the structure is understood.
For organizational leaders, this kind of systems thinking is increasingly relevant. Energy costs are a material factor for manufacturers, data centers, logistics companies, and any business with considerable facilities overhead. Understanding why winter power prices spike in New England, and why that spike is not arbitrary but mechanically derived from market structure, helps decision-makers plan procurement strategies, negotiate long-term contracts, and evaluate the real risks embedded in energy-dependent operations.
It also raises a deeper question about market design. New England's marginal pricing model is efficient in many respects, but it creates significant price volatility in constrained winter conditions. The oil generators that sit dormant for most of the year become the price-setters for the entire market during precisely the periods when consumers are most exposed. Whether that outcome reflects good policy or an artifact of historical infrastructure investment is a question that regulators and grid operators continue to debate.
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