The PJM Interconnection’s plan to delay its next capacity auction by about six months and possibly change its market rules could lead to lower near-term capacity prices but ultimately give rise to higher prices for a longer period of time, according to Morgan Stanley analysts.
The delay could push out the timeline for bringing new power plants online and make them more expensive, the analysts said in a note on Friday.
The potential delay to the auction for the 2026/27 delivery year also raises political risks related to the capacity market and high electricity prices, equity analysts said, noting that confidence in the market may be eroded. “It highlights the arcane, cumbersome, continuously changing nature of the PJM capacity market construct,” Paul Patternson, a Glenrock Associates analyst, said Monday. “Affordability is a really key issue that's developing here in the electric sector.”
PJM on Thursday told stakeholders it was preparing to ask the Federal Energy Regulatory Commission for permission to delay a capacity auction set to be held in December while it works with stakeholders to consider changing some of its market rules.
Power suppliers that could be affected by a delay include Constellation Energy, Talen Energy, Vistra and Public Service Enterprise Group.
PJM’s last capacity auction for the 2025/26 delivery year cleared at nearly $270/MW-day across most of its footprint, up more than nine-fold from the previous clearing price. The total costs to consumers from the auction jumped to $14.7 billion from $2.2 billion in the previous auction.
Since then, state utility regulators, power producers, state ratepayer advocates and environmental groups have asked PJM to change its market rules and the parameters it uses to set capacity prices. Proposals such as including reliability must-run units in the auction and changing “effective load carrying capability” measures would dampen capacity prices.
“These look more like near-term band-aids to avoid big price spikes while the market continues to be on pace to tighten significantly in the next 3-5 years,” Morgan Stanley analysts said, noting they anticipate significant data center load will be added in PJM’s footprint. “We expect this to lead to higher capacity and energy prices in the market.”
High capacity prices appear to be needed to spur new generation, according to Guggenheim Securities analysts. “The $270/MW-d clear has been seen by [power plant] developers … as a mediocre price signal for peaker newbuild economics — leaving us to question what the ultimate goal is here for stakeholders — someone will eventually have to pay for new capacity,” the analysts said in a note Thursday.
Potential changes to PJM’s capacity rules make forecasts for the next auction’s pricing outcome “highly uncertain” but prices would likely skew down from a $695/MW-day price cap that had been set for the December auction, Morgan Stanley analysts said.
Delaying the auction reinforces expectations that no new generation could be built before the capacity year that begins on June 1, 2026, and given that it takes four to five years to build a gas-fired power plant other upcoming auctions would likely see no “meaningful” generation come online to reduce capacity prices in later capacity years, according to the analysts.
“With so many recent changes to the PJM auction structure we think this will lower developers' confidence in the market, make it less likely that new gas plants will get built, and potentially raise the price and return hurdles for new plants,” the Morgan Stanley analysts said.
Less clarity about the auction’s timing and rules could affect generation investment decisions, according to Patterson.
Also, the delay could spark greater demand for behind-the-meter deals between data centers and nuclear power plants, the Morgan Stanley analysts said. “With so much market uncertainty we think there could be an increasing push toward long-term contracts with nuclear plants given the long-term 10-20 year certainty of power supply and price,” they said.
The delay could also have political repercussions, according to the Morgan Stanley analysts. “The PJM auction rules have changed numerous times, so political leadership in some states may lose confidence in the effectiveness of the market,” they said.
Further adding to the political pressure, given a compressed auction schedule, it is unclear how quickly generators will be able to respond with new power supplies, according to Patterson. But in the meantime, consumers are being asked to pay for those higher capacity prices while 60% of Americans live paycheck to paycheck, he said.
“High capacity prices are part of a situation in which affordability is becoming increasingly an issue that policymakers are going to have to deal with,” he said.
