More Record Capacity Prices for PJM

PJM, the nation’s largest electric grid operator, held its most recent capacity auction (called the “Base Residual Auction”) last month. The purpose of this auction is to ensure there are enough power plants and other resources available to satisfy electricity demand during the 12-month period June 2026 – May 2027 (referred to as “delivery year 26/27”). Energy Ventures Analysis prepared a report analyzing the auction results; here are a few takeaways from the report:

• Capacity prices reached $329.17 per megawatt-day. This is the second PJM auction in a row with record-setting capacity prices.  The total cost of capacity from this auction is projected to be more than $16.1 billion.  The cost of capacity in the previous auction was over $14.7 billion, which was a record until now.

• The capacity price would have been even higher had it not been for an upper limit that the Federal Energy Regulatory Commission placed on capacity prices. Without the limit, prices would have been almost 20% higher.
  

• There were three principal reasons for the high prices:
  • The forecasted peak demand for electricity increased by more than 5,000 megawatts (MW) compared to the previous year largely due to electrification and demand growth from data centers.
    
  • The Installed Reserve Margin (IRM) increased because of reliability risks.  The IRM is the amount of generating capacity that is needed as an insurance policy in case actual electricity demand exceeds the forecasted demand. 
    
  • Effective load-carrying capability (ELCC) for natural gas, battery storage, and solar power were lower compared to previous auctions.  ELCC helps determine how much capacity from a particular resource can be relied on to meet peak electricity demand.  This change to several ELCC values had the effect of increasing the amount of capacity that must be acquired through the auction.  
    

• High capacity prices show the need to prevent the retirement of dispatchable resources, such as coal, as well as to add new, reliable generating resources.

• The impact of the auction on ratepayers will vary.  Customers served by utilities that do not own power plants are likely to see the largest increases in their electric bills, whereas customers of vertically integrated utilities will see a minimal impact.

• The combination of increasing demand, retirement of dispatchable generation, such as coal, tougher reliability requirements, and the slow addition of new electricity sources means that capacity market challenges for PJM are likely to persist.