PJM's latest auction results shine a spotlight on the pressing need for new generation capacity and transmission investments

PJM’s latest auction results clearly indicate the need for new generation capacity and transmission investments. Nevertheless, an irregular capacity auction with changing rules, reduced accreditation for firm capacity, low energy margins for gas-fired units, and the backlog in the interconnection process creates significant challenges for new investments.

PJM's capacity market, called the Reliability Pricing Model, ensures long-term grid reliability by securing the appropriate amount of power supply resources needed to meet predicted energy demand in the future.

PJM's 2025/26 Base Residual Auction (BRA) resulted in record high prices reaching $269.92/MW-day ($98.5/kw-year) in most of the RTO, nearly ten times the prices cleared in the 2024/25 BRA ($28.92/MW-day). Prices hit zonal caps in Baltimore Gas and Electric (BGE) and Dominion, which are transmission constrained at $466.35/MW-day and $444.26/MW-day, respectively.

This is largely due to three factors:

1. Decreased supply: This is the fourth BRA where total capacity offered has declined. Plant retirements have played a role, with installed capacity offered (ICAP) falling 7GW compared to the previous auction to 195GW. The situation could worsen in the next five years with potentially higher levels of thermal generator retirements with no clear source of firm replacement capacity, as indicated in recent PJM's market monitor reports.
2. Increased demand: The large projected growth in electricity demand from mega data centers in the Dominion service territory in particular, along with potentially more recurrent extreme weather events like Winter Storm Elliot may further stress the system going forward.
3. Market reforms: The implementation of Marginal Effective Load Carrying Capacity (ELCC) has influenced lower capacity offerings in the auction. Market participants (BRA and FRR) offered 19.1GW less gas-fired capacity and 2.9GW less solar PV capacity compared to the 2024/25 auction. The reduction in gas-fired capacity offered is pretty much in line with the drop in the ELCC for gas-fired units from from a 95% availability to a range of 62% to 79%. The reduction in solar PV capacity is also proportional to the reduction in capacity accreditation with fixed tilt solar dropping from 33% to 9%, and solar tracking from 50% to 14%.

AFRY’s takeaways from the auction results:

• In the short-term, increased auction prices translate to further costs to consumers.
  • Consumers will now pay $14.7b for capacity in the 2025/26 delivery year, a significant jump up from $2.2b in the 2024/25 auction and nearly 35% higher than the $10.9 billion paid in the 2018/2019 auction, the previous highest level.
  • Utilities have stated that the new capacity prices could translate from a 5% increase in customer bills to twice as much in the next few years, depending on the jurisdiction.
• The system is tightening. After many years of oversupply in PJM, a combination of a large amount of coal retirements and the abrupt change to accreditation values has created a signal for new development.
  • PJM has stated that the auction’s prices should incentivise power producers to build new resources and maintain operating ones. However, the economics for new gas-fired capacity are more challenging, as spark spreads fall through the RTO in recent years. According to some developers, 40 to 50% of the revenue might need to come from the capacity market, which has significant pricing volatility and uncertainty.
  • The dramatic swing in prices has caused some to question the usefulness of the capacity market as a price signal. Brian Tierney, CEO of FirstEnergy, pointed out that while the recent auction resulted in high prices, only 110MW of new generation capacity was procured.
• Despite the positive signal provided by the recent capacity prices, there are hurdles which may prevent the required new capacity to be realised in a timely manner.
  • PJM has repeatedly delayed capacity auctions. The recent auction, which is meant to highlight need for new capacity for the 2025/2026 delivery year, leaves very little time for developers to act. This tight window between signal and need is likely to continue, as the current auction schedule shows that the traditional three years delivery threshold might not happen until the 2029/2030 BRA, scheduled for May 2026.
  • Market players see challenges to adding new capacity on even the traditional three-year timeline. According to Terry Nutt, CFO of Talen Energy Corp, “supply chain issues for turbines, transformers and other equipment in the global market presents challenges, meaning that building and bringing a new gas-fired plant online could take five years or longer".
  • PJM’s interconnection backlog also presents a significant hurdle in bringing new capacity to the market. According to a report released in May 2024 by Columbia University’s Center on Global Policy Energy, projects entering the queue today will likely not come online before 2030.
  • Challenges to bringing new capacity online quickly may cause PJM to resort to designating additional resources such as Reliability Must Run resources, as it has recently with the H.A Wagner and Brandon Shores units in Baltimore Gas and Electric (BGE).

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