The recent PJM capacity auction has resulted in a dramatic increase in energy prices, set to take effect in June 2025. This development is crucial for commercial and industrial businesses, as it will significantly impact their energy costs and overall operational expenses. Understanding the auction's mechanics and the factors driving this price surge is essential for effective energy management and risk mitigation. 

Key Takeaways 

• Gain insight into why PJM capacity auction prices will increase starting June 2025 and what this means for your business.
• Learn how the auction ensures resource adequacy and the significant cost implications it brings.
• Develop a clear understanding of the PJM capacity auction process and its impact on energy prices.
• Discover proactive steps your business can take to mitigate the financial risks associated with these changes. 

Read on if you're unfamiliar with the PJM Interconnection or capacity auctions. Otherwise, feel free to skip to "The factors causing the dramatic rate increase."

What is the PJM Interconnection? 

• What is the PJM Interconnection? PJM Interconnection is a regional transmission organization (RTO) responsible for coordinating the movement of wholesale electricity. It ensures reliability for the largest centrally dispatched grid in North America and operates a competitive wholesale electricity market. PJM’s role includes planning for future electricity needs and ensuring sufficient generation capacity to meet demand.
• What is an RTO, and what does it do? A Regional Transmission Organization (RTO) manages electricity transmission over large interstate areas. RTOs facilitate competitive wholesale electricity markets and ensure reliability and efficiency in the electric power system.

• What is PJM’s territory? PJM operates in all or parts of 13 states and the District of Columbia, including Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia, and D.C. Serving over 65 million people, PJM coordinates a vast network of power generators and transmission lines. 

   

What is the PJM Capacity Auction? 

The PJM capacity auction ensures there is enough electricity supply to meet future demand by allowing power generators to bid for capacity. The auction clearing price reflects the cost of securing this capacity, which helps maintain grid reliability during peak demand periods and prevents blackouts. 

PJM sets your capacity tag based on your electricity usage during the highest demand periods of the year, known as peak days. Your usage during the top five peak days and hours is measured, averaged, and updated annually to determine your share of capacity costs. Managing peak usage can reduce costs. 

What were the results of the most recent PJM Capacity Auction? 

The most recent auction, held in July 2024 for the 2025/2026 delivery year, saw capacity prices spike to $269.92/MW-day for much of PJM, marking an 833% increase from $28.92/MW-day in the previous auction. 

The factors causing the dramatic rate increase 

Several factors have contributed to the dramatic increase in capacity prices for the 2025/2026 delivery year: 

• Higher Forecasted Peak Load: Increased electricity demand, especially from sectors like data centers and EV charging, has heightened the need for additional capacity. As businesses and consumers adopt energy-intensive technologies, electricity demand is projected to rise, increasing capacity prices.
• Increased Installed Reserve Margin (IRM): The IRM is a required percentage above the forecasted peak load to ensure reliability. This margin acts as a buffer to handle unexpected spikes in demand or outages, maintaining grid reliability during extreme weather events.
• Changes in Effective Load Carrying Capability (ELCC): ELCC gauges renewable resources' reliable capacity contribution during peak demand. Adjustments to ELCC metrics have reduced the available capacity, resulting in higher prices.
• Retirement of Power Plants: Scheduled retirements, particularly of coal-fired plants, have diminished the available capacity. While transitioning to cleaner energy sources is crucial for reducing greenhouse gas emissions, it also poses challenges for maintaining grid reliability and affordability.
• Slow Starts with Renewable Sources: The integration of renewable energy sources has been slower than anticipated, exacerbating the supply-demand imbalance. Delays in interconnecting new renewable generating capacity have contributed to rising capacity prices. Faster interconnection of renewables could have alleviated some of the price increases.
• Higher Natural Gas Prices: Recent increases in natural gas prices have also influenced capacity prices, as natural gas remains a significant source of energy generation in the region.
• Regulatory Changes: Changes in market rules and regulations have impacted the capacity market dynamics. Regulatory shifts to improve market stability, emissions reductions, and infrastructure modernization have influenced capacity prices. These changes can lead to higher compliance costs and affect the overall cost structure of electricity generation.

• Supply Chain Disruptions: Ongoing supply chain issues have affected the availability and cost of materials needed for power generation and infrastructure projects. 

   

What this means for managing energy costs 

There's no way around it – energy prices will increase throughout the PJM region by as much as 29% starting this June. While new energy sources and regulatory pressures may stabilize prices, this increase is imminent. Although prices may decline over time, 2024 rates are unlikely to return. Businesses will face higher operational costs, making it crucial to reassess energy procurement and management strategies to develop a long-term energy management strategy. 

Also, energy demand growth is showing no signs of slowing down, with peak load forecasts for the 2026/2027 Delivery Year of 157,197 MW, which increased by 3,314 MW, a 2.2% increase from the prior year. With steady demand growth and a slow queue for bringing on new generation sources online, these elevated prices are likely to stay. 

How to mitigate energy price risks 

Businesses can take several steps to mitigate the risks associated with rising energy prices: 

• Energy Procurement: Optimizing energy procurement strategies is one of a business's most immediate enhancements to lower energy costs and reduce risk. Innovative tools and methodologies, such as hybrid procurement solutions and reverse auction platforms, streamline acquiring the market's most favorable rates smoothly.
• Demand Response Programs: Participating in demand response programs can provide financial incentives for reducing energy use during peak demand periods. These programs help balance supply and demand on the grid, and businesses can benefit from lower energy costs and additional revenue streams.
• Energy Efficiency Projects: Implementing energy-saving technologies and practices to reduce overall consumption is a proactive way to manage energy costs. Energy efficiency projects can include upgrading lighting systems, optimizing HVAC operations, and improving insulation. These measures reduce energy usage and enhance operational efficiency and sustainability. 

• Diversifying Energy Sources: Exploring alternative energy sources, such as renewable energy, can reduce dependency on traditional power grids and mitigate the impact of rising capacity prices. Investing in solar, wind, or other renewable energy sources can provide long-term cost savings and contribute to sustainability goals. 

   

In Conclusion 

The upcoming changes from the PJM capacity auction signal a critical moment for businesses to assess their energy strategies.  

By understanding the underlying factors driving this price surge, businesses can make more informed decisions to manage their energy expenditures and strategic planning for the future. Awareness of these developments is essential for companies navigating the challenging landscape of rising energy costs. 

Keep an eye out for our next article that will dive deeper into the potential risks and strategies for mitigating them.