Mid-Atlantic and Midwest grid operator PJM published the results of its generation capacity (termed the Reliability Pricing Model or RPM) auction for the 2026/27 planning year on July 22, with prices coming in at a new record of $329/MW-day, an increase of over 20% vs. the previous record (set last year) of $270/MW-day. So what’s driving these record prices, and what’s the outlook for power pricing in PJM going forward?  

PJM Capacity Price Drivers 

Recent record capacity prices in PJM have been driven by the following factors: 

  • PJM Market Reforms: PJM instituted substantial reforms to its capacity markets prior to the (then record) 2025/26 planning year auctions. The reforms were driven by the belief held by PJM and some other stakeholders that then current market design insufficiently considered risk in resource availability, and that clearing prices under that design were not sufficient to incent the addition of needed new resources. In the three years prior to the institution of these reforms, prices cleared at or below $50/MW-day.  
  • Load Growth: Total load in PJM, which had been stagnant for some time, has been growing briskly, with current forecasts of total load growth over the 2022/23 to 2026/27 period coming in at 6% (from ~150,000 MW in 2022-23, to 159,000 in 2026/27). Much of this growth is driven by demand from large new data centers across the region. 
  • Generation Resources & Mix: In contrast to the strong load growth, resources eligible to participate in the auction – in terms of installed capacity (ICAP) – have remained flat at approximately 195,000 MW. Additionally, the resource mix has shifted somewhat over the relevant period, with a decline in dispatchable/baseload assets such as natural gas and coal fueled power plants (predominantly due to coal retirements), and an increase in intermittent assets, i.e. wind and solar – thus reducing to some degree the amount of resources that could be counted on to perform during peak periods on the grid, even as load has been growing. 
  • Interconnection Bottlenecks: The number of generation projects applying to interconnect to the PJM grid jumped dramatically from 2018 to 2021, driven largely by a rush to build solar and wind resources, which resulted in bottlenecks due to limitations of study capacity (PJM needs to model overall grid impacts of each new generation project), which in turn has slowed down the overall rate of new generator connections.  

Each of these factors have contributed to today’s high capacity price, and while progress is being made in resolving the interconnection bottlenecks and PJM is seeing an uptick in new resources being offered into their capacity auctions, and further PJM has made some adjustments to its market rules likely meant to ease upward price pressures, the conditions of strong load growth are likely to persist, and there has not yet been a strong shift away from intermittent resources towards dispatchable or baseload assets.  

This all suggests that elevated capacity prices are likely to persist in this market at least in the near to intermediate term. 

The longer term outlook is of course less certain, as the impact of higher capacity prices may well result in stronger activation of investors towards building resources that can effectively contribute reliable capacity resources to the grid (e.g., dispatchable gas assets, battery storage systems), and political pressure may mount as the effects of these price increases are felt by consumers and industry – resulting in potential new rules or regulations, perhaps targeting data centers and requiring them to provide capacity, demonstrate ability to shift or curtail load during peak periods, or contribute to incremental grid costs.  

Leading indicators here include Senate Bill 6 in Texas, which requires large electric loads to participate in demand response or curtailment programs and also to bear a larger share of grid cost impacts, and the DOE’s evolving policy posture which frames data centers as capacity-/flexibility-providing resources, not simply load growth drivers. Jurisdictions in Indiana, Ohio, Virgina, and other states have also either approved/implemented utility tariff changes addressing large loads such as data centers or are actively considering and studying how to address grid and cost impacts from these loads. 

Policy makers may also respond to political pressure by creating other subsidy or price control mechanisms to blunt or manage the impact of changing grid conditions. (In fact, such action has already impacted the market, as the current auction clearing prices may well have been substantially higher if not for a price cap implemented by PJM in response to regional political pressure). 

However, there are other pressures supporting elevated capacity pricing into the intermediate to long-term. Supply chain bottlenecks continue to persist throughout the energy infrastructure ecosystem, with queues and delays being reported taking new equipment delivery for elements like natural gas combustion turbines and grid scale power transformers out to the late 2020s/2030.  

What’s more, capital costs for natural gas combustion turbines – both simple cycle ‘peakers’, and more efficient baseload/intermediate combined cycle systems – have risen markedly over the past decade, which translates to fundamental support for higher capacity prices.  

Turning to energy markets for power in PJM, we’ve seen quite different dynamics. While we have seen a marked increase in forward electricity energy pricing over the last 4-5 years, these increases are not near the dramatic increases in capacity prices. What’s more, spot electricity energy prices have remained quite muted – clearing substantially below forward prices for the past several years, and not all that much elevated as compared to long term historical spot prices.  

Explanations for this divergence center on the differing natures of markets for electric capacity and for electric energy. Whereas capacity markets operate at the edge of grid demand – the relative few hours of the year where grid demand is at the highest, on very hot summer afternoons and very cold winter mornings – energy markets operate across all hours of the year and all conditions of grid demand, meaning that for the vast majority of energy market clearing hours, grid demand is well below the edges and peaks, and the availability of capacity to serve that demand is not a concern. 

In those conditions, energy market prices are driven by the efficiency and fuel cost of generators operating at the margin, or marginal cost of energy. And so this is really why, outside of 2022 when we saw very significant price spikes in the natural gas fuel markets, electricity energy prices in PJM have remained relatively steady – power plants continue to operate at or above historical efficiency levels, and the underlying price of natural gas has also remained relatively stable.  

Grid capacity constraints reflected in higher electric capacity prices can have a strong impact on electric energy prices under certain conditions. If there are sustained periods of very high grid demand coupled with tight supply conditions and especially inordinate generator outages, there can be substantial price spikes – resulting in spot energy costs increasing by orders of magnitude.  

While these circumstances have plagued the Texas (ERCOT) energy markets for some time, we have yet to see such radically tight capacity/demand conditions in PJM driving very high spot energy market volatility. Even this year, which has seen substantially colder than normal winter lows and hotter than normal summer highs, overall capacity availability in PJM over sustained periods has been more than sufficient to meet high grid demands, and spot prices have remained stable.  

Some may argue that this supports the view that PJM has been overly conservative in its estimations of generator availability during peak periods – estimations which are essentially by PJM used to ‘derate’ the amount of capacity generators can offer into the capacity auctions, thus pushing down capacity supply and supporting higher capacity prices.  

But with load growth, generator retirements, slow additions of capacity, and a shifting resource mix, the practical generation supply and demand picture as it translates into the energy markets during peak periods bears careful monitoring to identify the potential for substantial spot energy price spikes which ripple into the electric energy market broadly.  

What does this all mean for energy managers and buyers?  

First, you should definitely be considering a strategy for actively managing capacity costs, as high prices are likely here to stay at least for a while and perhaps into the long term. With the reality of sustained elevated capacity prices coupled with ever increasing electricity transmission rates, peak demand management should be coming into sharp focus for anyone concerned with managing or reducing (or perhaps limiting the rate of increase) of total power costs.  

Management strategies can include reducing capacity and transmission ‘tags’ (each facility’s cost quantity determinant based on the facility’s power consumption during grid coincident peaks – often just one or five hours of the year) through load shifting, curtailment, thermostat setbacks, pre-cooling, or other tactics.  

You may also consider the value of on-site distributed energy resources (which can also provide a resiliency & reliability benefit) such as engines, batteries, fuel cells, and even combined heat and power systems. Energy efficiency projects will also see a higher/faster payback, and there are many strong incentives available for doing these projects. 

The relative stability of energy markets means that buyers have more flexibility here and potential for realizing some measure of cost savings, in particular in light of the persistent spread between forward and spot energy pricing. Buyers may strongly consider blended spot and forwarded strategies, which are actively managed to identify opportune buying windows and well-tuned spot to forward ratios based on prevailing market conditions.  

As always, all of these decisions and considerations should be managed within a well-considered, thorough, holistic and grounded energy strategy.