Chickens Come Home to Roost: PJM Capacity Prices Soar Over 800%

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--Look for retail electricity prices in the 13 states and the District of Columbia served by grid manager PJM (Valley Forge, Pennsylvania) to jump starting next year, following an 833% increase in the price of generation capacity resulting from PJM's capacity auction this summer.

All told, winning capacity bidders will be paid $14.7 billion in the 2025-26 delivery year, up from the $2.2 billion PJM paid in last year's auction. It is not yet clear how the sharply higher capacity prices for 2025-26 will affect future electric bills paid by retail customers in PJM's footprint, which includes all or parts of Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and the District of Columbia.

Last year, capacity costs accounted for roughly 8% of customer electric bills, a PJM official said in a media call after the results of the capacity auction.

Across PJM's footprint, the higher capacity prices sent developers, investors and utilities a clear investment signal about the need to build new generation and transmission assets, the agency said July 30 in announcing the results of the auction.

"The capacity auction has been a valuable tool over time to help PJM competitively secure resources to meet reliability requirements," PJM President Manu Asthana said in a statement. "The significantly higher prices in this auction confirm our concerns that the supply/demand balance is tightening across [our regional transmission organization, or RTO]. The market is sending a price signal that should incentivize investment in resources."

In a capacity market auction, PJM said it first accepts offers to provide capacity at the lowest cost. As the auction progresses, PJM accepts progressively higher-priced offers until enough capacity is assembled to meet the projected requirements for the future delivery year. At that point, when the auction clears, all sellers receive the last, or "marginal," offer price. This marginal price is also known as the "auction clearing price."

Capacity auctions are held annually by PJM and other grid managers to ensure there is sufficient generating resources, including reserve margins, to meet projected electric demand.

Unlike the supply of generation, where megawatt-hours are actually produced and delivered, in a capacity auction, companies submit bids for what they would charge for the legally binding right to supply electricity if called upon by the grid manager. Thus, the prices paid to companies for their willingness to generate electricity will be in addition to whatever price is charged by companies that actually generate electricity, plus other charges levied by the local utility.

In a PJM statement July 30, the grid manager reported that the capacity auction for the 2025-26 year "produced a price of $269.92 per megawatt-day (MW-day) for much of the PJM footprint, compared to $28.92/MW-day for the 2024-25 auction. Capacity auction prices fluctuate annually based on the need for investment in generation resources."

PJM said the sharply higher prices for capacity in 2025-26 stemmed from "decreased electricity supply caused by a large number of scheduled generator retirements, leading to fewer bids; increases in projected peak load; and market reforms approved by the Federal Energy Regulatory Commission" (FERC) (Washington, D.C.), which oversees bulk power sales between states. Those market reforms were designed to improve reliability risk modeling for extreme weather.

By fuel, the portfolio of capacity resources selected in the 2025-26 auction is:

• 48% natural gas
• 21% nuclear
• 18% coal
• 5% demand response
• 4% hydro
• 1% solar
• 1% wind
• 2% from other resources

Since last year's capacity auction, PJM said that approximately 6,600 megawatts (MW) of generation have been retired or have been announced to retire.

For at least 18 months, since a report it issued in February 2023, PJM has warned that generator retirements, interconnection delays and rising electric demand in its footprint could threaten the grid manager's ability to keep the lights on. More than 6,000 MW of generation capacity in the PJM footprint retired in 2022, and another 9,000 MW closed their doors last year. Roughly 7,000 MW of generation capacity is slated to retire this year.

Although planned retirements over the 2025-26 delivery year, which runs from June 1, 2025, through May 31, 2026, are expected to dip to about 2,000 MW each year, the cumulative effect of the retirements is becoming evident. PJM said about 21% of its installed capacity has shut down or signaled its intent to close between 2022 and 2030, according to the February 2023 PJM report, Energy Transition in PJM: Resource Retirements, Replacements & Risks.

Click on the image at right to see a graphic of actual and planned generator retirements in PJM over the 2022-2030 period.

It's not just generator retirements, though, that is pushing PJM capacity prices skyward. In announcing the results of the 2025-26 capacity auction, the grid manager said it "remains concerned with the slow pace of new generation construction. Approximately 38,000 MW of resources currently have cleared PJM's interconnection queue, but have not been built due to external challenges, including financing, supply-chain and siting/permitting issues."

Stu Bresler, PJM's executive vice president for market services and strategy, said: "Interconnection process reform is proceeding, but hurdles remain for many projects outside of our process. We are considering ways to accelerate those who can successfully overcome those challenges and build."

To facilitate the entry of new resources, PJM said it is implementing its FERC-approved generation interconnection reform, with about 72,000 MW of resources expected to be processed in 2024 and 2025.

In its July 30 statement, PJM also addressed rising peak load forecasts, some of which are driven by the proliferation of data centers, particularly those equipped with artificial intelligence (AI). Numerous new data centers have been proposed for Virginia, turning it into a global hub for AI-equipped data centers. For more information, see April 16, 2024, article - Data Center Construction Propels Electric Load Growth and Utility Capex.

For the 2025-26 delivery year, peak demand across PJM's 13 states and the District of Columbia is expected to rise to about 153,833 MW, up more than 3,000 MW or slightly more than 2% from last year's projection of about 150,640 MW.

Finally, FERC-approved market reforms, which increased recommended reserve margins, contributed to tightening the supply and demand balance, PJM said. The reforms, recognizing the impact extreme weather has had across several organized markets in recent years, changed the way extreme weather's impact on peak demand was calculated and established different reliability values for resources.

Industrial Info was not able to obtain additional information from PJM about generators selected in the capacity auction. But the grid manager identified several transmission-system additions and upgrades that were needed to move added volumes of power across the territory. Several of these projects were the responsibility of Dominion Energy Incorporated (NYSE:D) (Richmond, Virginia).

Industrial Info Resources (IIR) is the leading provider of industrial market intelligence. Since 1983, IIR has provided comprehensive research, news and analysis on the industrial process, manufacturing and energy related industries. IIR's Global Market Intelligence (GMI) platform helps companies identify and pursue trends across multiple markets with access to real, qualified and validated plant and project opportunities. Across the world, IIR is tracking more than 200,000 current and future projects worth $17.8 trillion (USD).