In this three-part series, we’re exploring the fallout from the PJM Interconnection’s latest capacity auction, which delivered historically high prices. This story examines the outlook for bringing new resources online and what may happen in upcoming auctions. A second story focused on how PJM views the auction results and what it's doing to facilitate new supplies in its region. The first story looked at how state lawmakers, ratepayer advocates and utilities are responding to the auction.
After the PJM Interconnection released the results of its latest capacity auction in late July with record-setting high prices, one of the key questions was how quickly would independent power producers respond.
In recent years, PJM’s capacity market had been signaling through its prices that there were ample power supplies in the grid operator’s footprint, leading to generator retirements, according to Glen Thomas, president of the PJM Power Providers, a trade group for independent power producers.
Before this year, PJM’s previous three auctions returned capacity prices of $50/MW-day, about $34/MW-day and $29/MW-day. In the July auction, for most of its footprint capacity prices jumped to nearly $270/MW-day for the 2025/26 delivery year, which begins June 1. Prices hit zonal caps of about $466/MW-day for the Baltimore Gas and Electric zone in Maryland, and $444/MW-day for the Dominion zone in Virginia and North Carolina.
“These results will get noticed,” Thomas said. “It's a build signal.”
However, generators won’t have much time to respond before PJM’s next auction, he said. It is set to be held in early December for the capacity year that starts June 1, 2026, giving new resources about 18 months to be available after the auction is held.
The initial response will likely be power plant owners deciding to keep their generating units running instead of retiring them and in some cases expanding their capacity, according to Thomas. “There's a lot of conversations happening internally at companies on just how to respond to these results,” he said.
Independent power producer Calpine on Aug. 22 said it is restarting its power plant development program in PJM, with a focus on Ohio and Pennsylvania. “The PJM market needs and values reliable, dispatchable, non-duration-limited power,” said Caleb Stephenson, executive vice president for commercial operations at Calpine, which mainly owns gas-fired power plants.
While not directly related to PJM, Thomas noted that late last month LS Power Group said it closed an oversubscribed $2.7 billion equity fund to invest in energy infrastructure.
Demand response, batteries and reconductoring
The high capacity prices may also spur retail demand response, battery and distribution reconfiguration efforts that effectively reduce wholesale electricity demand, according to Kent Chandler, a resident senior fellow at the R Street Institute.
“Your avoided cost of generation capacity just increased eight or nine times in some of these places so a retail, distribution-side battery program all of a sudden makes a whole lot more financial sense,” said Chandler, whose term as chairman of the Kentucky Public Service Commission ended June 30.
The capacity auction’s high price decreases the payback period and increases the benefit-cost analysis of a lot of retail programs that reduce demand and have a downward pressure on future capacity prices, according to Chandler.
“Those things pencil out far faster now, and they can be put in fairly quickly, without having to do anything at the [regional transmission organization] level, without having to change any law, and a utility can just go and apply to their retail regulator and ask for this new program,” Chandler said “The response time on all of that could be a year and a half or less, all before the delivery year.”
On the generation side, the rates that are paid to “qualifying facilities” under the Public Utility Regulatory Policies Act are typically based on avoided costs, Chandler noted. Qualifying facilities are relatively small and potentially could be easier to site and build than larger power plants, he said.
The auction results will likely encourage power plant owners to invest in increasing the capacity of their facilities, referred to as uprates, and could result in an increase in output of 5% to 10% depending on the investment, according to Chandler.
However, it is unclear if utilities and generators will have the confidence they can commit to bringing new resources into service by June 1, 2026, the beginning of the delivery year for the upcoming December auction, Chandler said.
Auction outlook: uncertainty, volatility
Looking ahead, capacity prices could go higher in PJM’s next auction in December, according to Morgan Stanley analysts and Scott Niemann, managing director and principal at ESAI Power, a market research and consulting firm.
Capacity prices for the majority of PJM’s footprint could hit a $695/MW-day price cap, given the region’s tight supply-demand conditions, Morgan Stanley said in a report late last month.
“The upcoming auction should clear at a high price, unless there's more unanticipated supply than what most people are expecting,” Niemann said. “It's really a question of how high the prices go. It's a very plausible outcome that the market clears at the price cap of $700 but there are other scenarios where you can be substantially lower than that.”
In the upcoming auction, PJM will use a steep demand curve, which helps determine capacity prices, so that a small change in supply can make a huge difference in price — for example, a 1,000-MW shift in supply could lead to a roughly $200/MW-day price swing, according to Niemann. “It just adds a lot more uncertainty to the auction outcomes going forward,” he said.
Between changes in PJM’s market rules and limited transparency on generators’ plans, there will be an error band around supply estimates and “the price swings associated with that error band are just a lot greater than they were when the [demand] curve was less steep and the market had a little bit more surplus supply,” Niemann said.
Niemann expects about 1,000 MW of gas-fired generation that is being built and a roughly equal amount of new renewables and energy storage will be online by the summer of 2026, which would offset some but not all expected demand growth, he said.
At the same time, PJM’s condensed capacity auction schedule will make it harder for resources to respond to price signals, according to Niemann.
Normally, PJM holds capacity auctions once a year to buy capacity three years in advance. But because of a pause in auctions that was needed to give PJM time to revise its market rules, the grid operator has made adjustments to transition back to its normal schedule.
PJM is preparing to hold its next auction in December for the 2026/27 delivery year, followed by three auctions six months apart. An auction planned for May 2027 for the 2030/31 delivery year would return PJM to its annual schedule.
The shorter lead times between the upcoming auctions and their delivery years, plus the tight supply-demand conditions mean price swings in PJM’s capacity auction may become more common, according to Niemann.
“Even beyond the next auction, we're going to be in a higher-priced market for another few auctions, just because PJM is doesn't have a lot of surplus capacity anymore,” Niemann said.
