Clear and Present Pricing Danger: PJM Capacity-Charge Increases Are Coming Home to Roost

By Keith Jennings, Director, Pricing Desk, Transparent Energy

On July 20^th, 2024, PJM – the Regional Transmission Organization that manages the electric grid across 13 Mid-Atlantic states – released the results of its annual Base Residual Auction (BRA) for the 2025-2026 planning year. The results of the auction were stunning, even for the most bullish prognosticators – a 750% weighted average increase in capacity costs across PJM. 

This will impact every customer in the region with higher electricity prices beginning on June 1, 2025.

Electric supply costs are made up of several components. Currently, third-party supply quotes for a typical PJM customer would be broken down as follows:

Going forward, the capacity component will increase from ~6% to 15-20% of the total supply rate. Results will depend on each specific customer and utility, but initial estimates show projected cost increases in the $0.012 to $0.018 per kWh range. For a customer using 20,000,000 kWh per year, this means an annual cost increase between $240,000 to $360,000. Keep in mind, this is just the increase in capacity costs. The energy component has also increased, as natural gas prices have jumped more than 60% over the past 6 months.

Big changes are afoot in energy, and it’s crucial that you understand them and adjust your strategy accordingly.

Current & Future Capacity Costs in PJM

PJM’s primary purpose is to ensure grid reliability by making sure there is always enough power generation to meet the needs of end-users across the grid in real time. One of the ways it does this is by implementing a capacity market to help incentivize new generation. Capacity costs refer to the payments made by PJM to power plants and other resources that are available to help electric supply meet demand. These costs are vital to incentivize new generation and ensure that adequate resources are available when needed. Within the PJM system, the BRA is the process used to procure the necessary capacity to meet demand for future planning years.

Capacity costs for the 2025–2026 Planning Year, spanning from June 2025 to May 2026, have risen dramatically due to a combination of factors, primarily increased demand, the retirement of older generating facilities, and higher natural gas prices.

Unfortunately, more price increases are in the forecast. Looking ahead to the 2026–2027 and 2027–2028 Planning Years, where BRAs are tentatively scheduled in 2025, elevated capacity costs are expected to continue.

PJM Seeking FERC Support

In recognition of the generation shortfall in the latest auction held in July 2024, PJM has proposed several changes to future BRAs, including modifications to several supply components to be included in future planning years. The Federal Energy Regulatory Commission (FERC) approved several critical initiatives proposed by PJM, including the Resource Reliability Incentive (RRI), Reliability Must-Run (RMR), and System Impact Study (SIS). These changes are designed to encourage new resource investment and ensure that critical assets remain available to support the grid. The implementation of these initiatives is likely to drive capacity costs even higher over the next 3-5 years.

Moreover, there is a pending legal decision. In December 2024, Pennsylvania Governor Josh Shapiro filed a lawsuit with FERC to prevent further price hikes. Any progress made by this litigation is likely to come wih concessions that will limit the floor for capacity costs in the future. PJM has proposed a floor price of $175/MW-Day and a cap price of $325/MW-Day for future auctions, specifically for the planning years of June 2026 through May 2027 and June 2027 through May 2028.

From a 30,000-foot view, these price floor and cap mechanisms aim to mitigate massive swings in costs, like what we saw for the 2025-2026 planning years, while ensuring that there is sufficient capacity to meet future electricity needs. The proposed cap and floor will likely have a noticeable impact on capacity market prices, potentially limiting volatility but also ensuring elevated costs compared to years prior.  

Impact on Consumer Electricity Rates: The Case of PSE&G

The rising capacity costs are already starting to have tangible effects on consumers, as evidenced by recent announcements from utilities like Public Service Electric & Gas (PSE&G) in New Jersey. PSE&G recently released messaging to its customer base indicating that, starting June 1, 2025, its customers will face increased supply costs because of rising energy demand combined with the new for new power generation. Other utilities across the region are taking similar actions to prepare businesses for a sharp increase in electric costs. This increase is directly correlated with the anticipated rise in capacity costs within the PJM market. The ongoing price hikes in the capacity auctions and related adjustments to market conditions are expected to significantly increase the operational costs for utilities, which are then passed on to end users.

The situation is further complicated by the broader market trends, including rising prices in the wholesale electricity market, which are closely tied to the increasing cost of natural gas. As natural gas prices continue to rise, they influence the LMP (Locational Marginal Price) for electricity, adding additional upward pressure on both capacity and energy prices. Here is a look at the forecasted changes in market dynamics in the PSE&G territory:

What Does This Mean for Your Business?

As the PJM electricity market prepares for significant changes in capacity costs, stakeholders from utilities to consumers must brace for the impact. The upcoming auctions for 2026–2027 and future planning years, combined with FERC-approved initiatives like RRI, RMR, SIS, and pending proposals, will likely result in increased costs in the years ahead.

For consumers, the direct consequence of these rising costs is clear, as utilities and suppliers are sending pre-emptive warnings of the upcoming increase in electricity costs beginning this upcoming June. PSE&G customers, for example, are looking at a nearly 20% increase in their electric bills.

Whether your business is in PSE&G, PJM, or elsewhere, the message is clear: Times have changed, and it’s time to up your game in energy strategy and execution.

While capacity increases are unavoidable, Transparent Energy can help you mitigate those increases with a bespoke managed approach to retail energy procurement, capacity tag management, and Demand Response programs.

To reiterate: Following two years of historically low prices and minimal price volatility, the increase in capacity costs combined with the upward pressure on energy prices presents a challenging picture for energy buyers.

It’s your choice: sit back and get steamrolled by these changes, or work with a partner with the proven skill, process, and technology to help you succeed in these volatile markets.

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Want to learn more about the impact of rising capacity costs on your energy budget? Ready to discuss proven strategies for mitigating these and other costs? Contact us today at letstalk@TransparentEdge.com