This is the first story in a three-part series exploring the fallout from the PJM Interconnection’s last capacity auction, which delivered historically high prices. The second story will examine how PJM views the auction results and what it's doing to facilitate new power supplies in its region. A third story will examine what may be ahead in upcoming PJM capacity auctions.
The PJM Interconnection on July 30 announced that capacity costs will soar to $14.7 billion for the 2025/26 delivery year — the 12-month period that starts June 1 — up from $2.2 billion in the previous auction.
The next capacity auction for the 2026/27 delivery year is set for early December and there's no reason to believe the resulting prices won’t be at least as high, which could lead to about $30 billion in capacity costs over two years, according to Steve Lieberman, vice president of transmission and regulatory affairs for American Municipal Power.
“It's a mind boggling, staggeringly incomprehensible number,” he said.
The jump in capacity prices was primarily driven by power plant retirements, increased load and new market rules, according to PJM, which runs the grid and wholesale power markets in 13 Mid-Atlantic and Midwest states, and the District of Columbia. The auction drew 110 MW in new generation, down from 330 MW in the previous auction.
The auction results come as PJM has been warning it could face power supply shortfalls late this decade. At the same time, after delays in holding auctions, PJM is trying to catch up to its normal annual auction cycle for buying capacity three years in advance, Lieberman said.
The high capacity prices may lead power plant owners to delay planned retirements, but there isn’t enough lead time to respond by building new power plants, a process that takes years to complete, according to Lieberman.
“Houston, we have a problem,” he said. “If we don’t see new capacity in the [2027/28] auction, we’re really running out of time.”
So what are utilities, state lawmakers and utility regulators doing in response to the high capacity prices? Some utilities are seeking to get back in the power business while lawmakers are looking at ways to get generating resources online more quickly.
Deregulated utilities offer to provide power supplies
Investor-owned utilities operating in deregulated states such as Illinois, Maryland, New Jersey, Ohio and Pennsylvania contend they could be part of the solution.
In financial earnings conference calls after the auction results were released executives from Exelon, FirstEnergy and PPL said their utilities — which generally no longer own power plants — could help get new generation online to ensure PJM has adequate power supplies.
“I’d call yesterday’s [PJM auction results] the canary in the coal mine, and the canary didn’t make it,” Brian Tierney, FirstEnergy president and CEO, said on July 31.
Tierney doubts PJM’s capacity market will attract significant power plant investment into the region. “So it’s something we need to figure out,” he said. “I just don’t think the PJM construct is going to fix the issue even if it sends some positive price signals.”
Earlier this year, officials from Exelon, FirstEnergy, PPL and Duquesne Light sought a meeting with state utility regulators to argue that their companies could have a role helping ensure PJM has enough power supplies, according to Kent Chandler, a resident senior fellow at the R Street Institute.
They pressed their case in that meeting in February, which was held at the same time as the National Association of Regulatory Utility Commissioners’ winter policy summit, and Duke Energy and American Electric Power advanced the same talking points publicly at a June meeting of the Mid-Atlantic Conference of Regulatory Utilities Commissioners, said Chandler, whose term as chairman of the Kentucky Public Service Commission ended June 30.
“They’ve been laying the groundwork for this for a while,” Chandler said, noting that getting into generation would expand their ratebase, and thus their earnings.
But there didn't seem to be much interest amongst regulators in moving away from restructuring in areas of PJM, according to Chandler, former president of the Organization of PJM States Inc., or OPSI, which represents state utility regulators. “In my conversations with retail regulators, there does not seem to be much interest in shifting the risk of financing generation from shareholders to customers for the exclusive benefit of utilities,” he said.
Further, in many PJM states, lawmakers would likely need to pass legislation to allow utilities to get back in the power plant business, Chandler noted. “It will be an uphill battle for these states to reregulate,” he said.
State ratepayer advocates haven’t expressed interest in reregulating utilities, according to Greg Poulos, executive director of Consumer Advocates of the PJM States. “There is some reluctance to support that approach,” he said.
Generally, ratepayer advocates in PJM support competitive wholesale markets, but the auction results are eroding their confidence in the grid operator’s ability to run the markets, he said.
Certain flaws in PJM’s capacity construct, such as reliability must-run resources not participating in auctions, are magnified and will cost consumers billions as the grid operator returns to standard annual auctions for capacity three years ahead of time, Poulos said. The failure to include RMR resources in the auction added about $5 billion in costs to the last auction, ratepayer advocates said in an Aug. 30 letter to PJM.
State lawmakers eye bills to spur generation
Meanwhile, key utility-oriented state lawmakers in Maryland and Pennsylvania said they were open to the idea of giving utilities a role in power generation, but that they were focused on other avenues to help bring new power supplies online.
There are “reasonable conversations” about the pros and cons of reregulating the utility sector in Maryland, but it wouldn’t address near-term problems, according to Maryland state Delegate Lorig Charkoudian, a Democrat.
Instead, Charkoudian said she is focused on legislation that could pass in the Maryland General Assembly’s next session. She is considering introducing a bill aimed at adding energy storage to the distribution system as a bridge to more generation coming online in Maryland, she said.
Another option under consideration would modify the state’s solar renewable energy credit program to help advance ready-to-go solar projects, according to Charkoudian.
PJM’s auction results have been a “wake up call” for Maryland state lawmakers on related issues such as interconnection queue reform, reliability must-run contracts and transmission planning. “It has all come to a head in this capacity auction,” she said.
The auction results weren’t unexpected to Pennsylvania state Sen. Gene Yaw, a Republican and chairman of the Senate Environmental Resources and Energy Committee.
“I think the handwriting has been on the wall for a couple of years as to where things are going to go,” Yaw said. “The PJM auction just kind of confirmed what a lot of people have been talking about with the supply situation.”
Thermal baseload power plants have been retiring in PJM without adequate replacements, according to Yaw.
It would be “reasonable” to consider letting Pennsylvania utilities back into the power supply business, he said.
However, Yaw said he is focused on two bills he plans to introduce: one that would create a revolving fund to support power plant construction and another to provide greater certainty to the state’s permitting process.
Maryland PSC eyes options
Maryland could be especially hard hit with rate hikes driven by the capacity auction, according to a mid-August report from the Maryland Office of People’s Counsel. It found that electric bills in Maryland could jump 2% to 24% depending on the location.
After getting over the “shock” of the auction results, utility regulators, officials from other state agencies and lawmakers are talking about how Maryland should respond to the spike in capacity prices, including how to possibly add in-state generating resources, according to Michael Richard, a commissioner on the Maryland Public Service Commission.
“Suddenly seeing a 500% to 800% increase in capacity prices, that is not indicative of a well functioning market. They need to look at their [market] constructs and do it quickly.” Richard said. “We know we need additional resources, but we need PJM to be a partner with us in getting these resources online.”
It would help to have increased transparency from PJM about where solar and storage would be most effective on the distribution system, according to Richard.
Richard said discussions about the capacity auction are also going on among state regulators at OPSI.
“There needs to be a consideration for the ratepayer,” Richard said. “We need some predictability in the market.”
