A Tale of Two Auctions: PJM, Capacity Prices, and You

By Paul Shagawat, Co-Founder and Managing Director, Transparent Energy

By now you know about the results of PJM’s July 20, 2024 annual Base Residual Auction for the 2025-26 delivery year. Capacity costs increased 800% and made national news, surprising everyone from hardened energy professionals to more casual observers in the C-Suite.

But have you heard about the next auction? And, more importantly, do you know what to do about it to position your company to best absorb another potential major capacity-price spike?

If not, read on. But first, a few takeaways from the most recent auction.

Good News, Bad News

The good news, if there is any, is that capacity charges are only one among many ancillary charges on the supply portion of your monthly bill. The largest component of your energy supply charge is by far the price of the commodity itself. An 800% increase in capacity charges doesn’t mean your energy bill will increase by 8x – not even close.

The bad news, however, is several fold. First, capacity charges for companies operating in PJM had typically accounted for 7-8% of the total energy bill. That percentage will now likely rise, depending on your load. The other thing that’s not so great is that the die has been cast on this increase for your business. That’s because your capacity charges for the 2025-26 season are based on your Peak Load Consumption during the five hours of highest demand on the grid this past summer. These 5 Capacity Peak (CP) hours have already occurred.

So, unless you have access to a time machine, you’re not going to be able to go back and change this. But you are going to be able to learn from the experience.

That’s because there’s another auction coming up. Again, it doesn’t look good, but this time you can be prepared for it. And that’s what I want to focus on now.

Preparing for the Next Capacity-Charge Hike

PJM’s capacity auction for the 2026-27 delivery year had been set for December 2024 (it was recently postponed for at least six months), with Morgan Stanley forecasting the potential for an additional triple-digit rise – up to 157% – as reported by Utility Dive.

Just to be clear, this expected 157% increase would come on top of the recent 800% leap, meaning large energy users in PJM would be looking at an ~1,256%+ increase in capacity costs for 2026-27 compared to the 2024-25 delivery year.

But whereas you were most likely a “price taker” for the most recent capacity auction (because summer 2024’s peak days have already come and gone), you do have the power to blunt the coming auction’s anticipated price spike.

It’s time to get proactive. Here’s how:

• Work with a trusted energy advisor like Transparent Energy. Managing energy costs is getting more complex by the day (whether you are operating in PJM or not). The rewards of working with an expert resource fully dedicated to the nuances of energy markets and how to expertly transact in them are many-fold. Doing so is a high ROI proposition, one that can greatly reduce risk and cost.

• Develop and execute a strategy to curtail load during the 5 peak demand hours/days in 2025 from which your capacity costs will be assessed/fixed/measured.

Specifically, these strategies include:

• Participate in Demand Response programs, which a) alert you in advance of days/times of peak demand on the grid, which in turn, b) direct you to reduce your load at moments that will favorably impact your future capacity charges (helping you lower them!), and c) pay you for the energy you didn’t use at those moments of high stress on the grid.
  If that sounds a little complicated, that’s because it is, and that’s another reason why working with an experienced energy advisor is so important. That expertise will not only help you get the most out of your demand-response participation, including getting you into the most advantageous contracts and helping you maximize the value of those contracts through the appropriate actions and behaviors, but it will make the whole process, from beginning to end, easier and less stressful.
• Explore load shifting, energy efficiency, and energy storage solutions (think everything from high-efficiency boilers, chillers, and lighting to back-up generation) to lower your Peak Load Contribution values.

• Deploy energy management software, for example a Building Management System (BMS), to control ambient temperature and lighting, automating energy reduction.

• Use alternative fuel sources, including propane, diesel, oil, natural gas, and biomass, as appropriate, to power your own on-site generators. Again, by teaming with an expert energy advisor, your back-up generation capabilities can be transformed into a precise strategy to meet capacity-cost reduction goals.

• Maximize the impact of your load-curtailing efforts by entering into the right kind of energy supply contract. For example, companies successfully curtailing load in the summer of 2025 shouldn’t “fix” their capacity charges for 2026 (those fixed capacity charges don’t take into account your load-reduction efforts); instead, opt for capacity charges as a “pass through” on your bill (so you are charged on your actual peak usage). Energy contracts matter – entering into the best one for your business is an art form, not a mindless administrative task. (Re-read step 1 above).

Conclusion

PJM’s summer 2024 capacity auction underscores a solemn truth for large energy buyers: energy is volatile and full of risks, some that can be predicted, others that can’t. Let this event serve as an eye-opener that guides and improves future behavior. We know there is another potentially large increase coming with the 2026-27 PJM capacity auction (now slated for 2025). More importantly, we know what to do about it.

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If you’d like to learn more about mitigating the impacts of future capacity price increases, or how to navigate volatile energy markets to firm up your bottom line and protect profitability, contact Transparent Energy at letstalk@TransparentEdge.com.