The good news is that we now know the price of capacity through May 2026. The bad news is that capacity prices have increased by approximately 5x over the last auction. The surge in price was fueled by power plant retirements, rising regional demand, and regulatory requirements seeking to address the participation of renewables and how much capacity they can provide during periods of system stress. Before examining the details of this latest auction, it’s important to review how the capacity market got to where it is today. As a refresher, the PJM Interconnection operates the largest competitive wholesale electricity market in the United States, serving 65 million people across 13 states and the District of Columbia as shown in Figure 1. Its primary function is to coordinate the flow of power and develop market rules such that the system operates reliably and safely. A critical component of PJM's operations is its capacity market, which ensures long-term reliability by securing sufficient resources to meet future electricity demand.
How PJM's Capacity Market Works
The capacity market was designed to provide revenue to power plants, incentivizing them to be available during peak demand periods. In many ways, capacity is like an insurance payment that is paid in advance to ensure that electricity supply and demand are in balance. PJM's capacity market operates through a series of auctions. These auctions are designed to procure the necessary capacity resources three years in advance. The primary auction, known as the Base Residual Auction (BRA), is followed by incremental auctions that allow for adjustments based on changes in electricity supply and demand forecasts.
Participants in the capacity market include generation owners, demand response providers, and energy efficiency resources. These participants submit offers to provide capacity, which PJM evaluates based on cost and reliability criteria. Successful bidders receive capacity payments in exchange for committing to be available during peak demand periods. The cost of capacity is included in all PJM’s retail power sold to end users and can be as much as 30% to 45% of the supply portion of one’s electricity rate.
Challenges for PJM and the Path Forward
The PJM capacity market has faced several challenges and changes in recent years, namely, fluctuating capacity prices, regulatory changes, and the integration of renewable energy sources. In December 2019, the Federal Energy Regulatory Commission (FERC) issued a pivotal ruling that required PJM to fundamentally alter how it conducts its capacity auctions. Since then, multiple additional rulings and regulatory changes have followed, leading to significant delays and disruptions in the usual auction schedule, resulting in a five-year period of uncertainty and deviation from the norm. The Energy Transition and the specific sustainability goals of certain states within PJM have made the valuation of capacity more complex. Some states have offered subsidies to incentivize the development of renewable power assets. These subsidies not only artificially lowered capacity prices but these low capacity prices suggested that there was enough generating capacity in PJM to keep up with demand on the coldest and hottest days of the year. This was clearly not the case since many generating assets (23% of PJM’s entire generation fleet) were unable to perform when called upon during Winter Storm Elliott two years ago.
The data in Table 1 shows that PJM’s RTO marginal price for capacity fell from $141.64/MW-day to $28.92/MW-day, or nearly 75% over the last four auctions.
RTO clearing price over last four years.
Table 1 by 5
You’re almost caught up. In June 2023, The Federal Energy Regulatory Commission (FERC) approved a PJM request to further delay capacity auctions for 2025–2029. The requested delay cited an analysis that warned of a potential mismatch between resource retirements, load growth, and the pace of new generation entry. Significant improvements were necessary in PJM’s capacity model.
On July 30, 2024, PJM published its first capacity auction results in almost two years and posted results for the BRA for Planning Year (PY) 2025/26. The new results, as anticipated, are significantly higher than the prices for PY 24/25 as outlined in Table 2. Overall, the price of capacity increased between three and eight times from the previous auction. The published prices for selected zones in PJM are shown in $/MW-Day with a $/MWh estimate based on a 1 MW capacity tag and a 50% load factor. The cost increase for most parts of PJM is $22.53/MWh or 2.253 ¢/kWh. Keep in mind that while capacity costs are up substantially, Table 3 shows the full picture of what this means to total energy rates (using PPL as an example).
The final “catch up” auction is set to be run in December 2024 for PY 2026/2027, after which PJM should return to its normal auction schedule. Despite higher prices, energy buyers should expect more transparency and certainty in the capacity component of longer-term fixed price electricity contracts after that auction in December.
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Organizations with contracts that end prior to 6/1/2025, should be unaffected by these latest auction results. However, anyone with fixed price electricity products that extend beyond 6/1/2025 should expect adjustments to those fixed prices as suppliers may pass through these capacity cost increases through change-in-law provisions in their contracts. Businesses that have waited to lock in fixed prices beyond June 2025, should expect to see these new capacity prices reflected in future offers from suppliers. To understand how you may be impacted please contact your Energy Advisor at 5.
To try to end on a positive note, higher prices can create some opportunities for end users. Higher capacity prices are a signal that the market values generation as well as flexible energy loads that can curtail during peak times. One would expect Demand Response programs to be more lucrative in the future. If you have not explored ways of participating in Demand Response (programs that pay you to reduce load at peak times), or if the economics did not make sense before, now may be the time to revisit these programs. There is also an opportunity to reduce your capacity tags to offset the higher prices charged on future contracts.
