PJM Capacity Auction – update

The PJM Capacity Auction is a critical mechanism used by PJM Interconnection, the regional transmission organization overseeing the electric grid across 13 states and Washington, D.C., to ensure long-term grid reliability. This auction secures commitments from electricity generators to be available to meet future demand, with costs passed on to consumers.

Impact on Business Energy Costs

The most recent PJM capacity auction for the 2025–2026 delivery year resulted in a significant increase in capacity prices, rising from approximately $29/MW-day to nearly $270/MW-day—a more than 800% increase. This surge will take effect on June 1, 2025, and is expected to substantially raise electricity bills for businesses. For instance, businesses with a 50% load factor may see capacity charges increase from $0.0046 to $0.0225 per kWh, leading to annual cost hikes ranging from $240,000 to $360,000 for those consuming around 20 million kWh annually.

Factors Contributing to the Increase

Several interrelated factors have contributed to the dramatic rise in capacity prices:

• Retirement of Fossil Fuel Generators: Accelerated closures of coal and nuclear plants have reduced available generation capacity.

• Delayed Renewable Integration: While there's a significant pipeline of renewable projects, over 97% of which are solar, wind, or battery storage, many face delays in approval and interconnection, limiting their contribution to capacity needs.

• Rising Demand: The rapid expansion of energy-intensive facilities like AI data centers has significantly increased electricity demand, particularly in regions like Virginia.

• Transmission Constraints: Bottlenecks in the transmission infrastructure hinder the efficient delivery of electricity, exacerbating supply challenges.

• Market Rule Changes: Adjustments in market rules and capacity procurement processes have also influenced price outcomes.

Mitigation Strategies for Businesses

To manage and potentially reduce the impact of rising capacity costs, businesses can consider the following strategies:

• Fixed-Rate Contracts: Locking in long-term fixed-rate electricity contracts can provide price stability and protect against market volatility.

• Demand Response Programs: Participating in demand response initiatives can offer financial incentives for reducing electricity usage during peak periods, thereby lowering capacity charges.

• Energy Efficiency Measures: Investing in energy-efficient technologies and practices can decrease overall consumption and peak demand, leading to lower capacity-related costs.

• On-Site Generation and Storage: Implementing on-site renewable energy systems or battery storage can reduce reliance on the grid during peak times.

• Contract Audits: Regularly reviewing and auditing energy contracts can identify opportunities for cost savings and ensure favorable terms.

Accountability for the Increase

The responsibility for the surge in capacity prices is multifaceted:

• PJM Interconnection: Critics argue that PJM has been slow in processing renewable energy projects and has favored fossil fuel generation in its planning, contributing to supply constraints.

• Federal Energy Regulatory Commission (FERC): FERC's approval of PJM's proposals, including price caps and floors for capacity auctions, has influenced market dynamics and price outcomes.

• State Policies: State-level decisions, such as the accelerated retirement of fossil fuel plants without adequate replacement capacity, have impacted the supply-demand balance.

• Market Participants: Delays and challenges faced by renewable energy developers in bringing projects online have also played a role in limiting available capacity.

Today the increase in capacity prices is the result of complex interactions between regulatory decisions, market dynamics, infrastructure challenges, and evolving energy demands.

Historical PJM Capacity Auction Clearing Prices

Below is a summary of the BRA clearing prices over the past 20 years:

Note: The 2025/26 delivery year saw a record-high clearing price of $269.92/MW-day, a substantial increase from previous years.

📈 When Will PJM Capacity Prices Go Down?

As of now, there is no definitive timeline for when PJM capacity prices will decrease. Several factors contribute to the current high prices:

• Supply Constraints: Retirement of coal and nuclear plants has reduced available generation capacity.

• Delayed Renewable Integration: Many renewable projects face delays in approval and interconnection, limiting their contribution to capacity needs.

• Rising Demand: The rapid expansion of energy-intensive facilities like AI data centers has significantly increased electricity demand.

• Transmission Constraints: Bottlenecks in the transmission infrastructure hinder the efficient delivery of electricity.

Efforts are underway to address these issues, including regulatory changes and infrastructure investments, but these solutions will take time to implement.

📉 Outlook for Small Businesses

The surge in capacity prices directly impacts small businesses by increasing their electricity bills. For example, businesses with a 50% load factor may see capacity charges increase from $0.0046 to $0.0225 per kWh, leading to annual cost hikes ranging from $240,000 to $360,000 for those consuming around 20 million kWh annually.

To mitigate these impacts, small businesses can consider the following strategies:

• Fixed-Rate Contracts: Locking in long-term fixed-rate electricity contracts can provide price stability and protect against market volatility.

• Demand Response Programs: Participating in demand response initiatives can offer financial incentives for reducing electricity usage during peak periods.

• Energy Efficiency Measures: Investing in energy-efficient technologies and practices can decrease overall consumption and peak demand.

• On-Site Generation and Storage: Implementing on-site renewable energy systems or battery storage can reduce reliance on the grid during peak times.

• Contract Audits: Regularly reviewing and auditing energy contracts can identify opportunities for cost savings and ensure favorable terms.

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