Dive Brief:
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Capacity prices for the majority of the PJM Interconnection’s footprint could hit a $695/MW-day price cap, up 157% from the record-high of $270/MW-day reached in PJM’s July capacity auction and driven by tight power supplies, according to a report released Wednesday by Morgan Stanley.
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The potential jump in capacity prices 2026/27 delivery year auction set for December would be a financial boost to power plant-owning companies such as Constellation Energy, Vistra, Public Service Enterprise Group, NRG Energy and Talen Energy, Morgan Stanley analysts said after PJM released the “planning parameters” for the pending auction.
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With the upcoming auction’s steep demand curve, a small change in supply can make a large difference in price, according to Scott Niemann, managing director and principal at ESAI Power, a market research and consulting firm. It’s a “very plausible” outcome that the auction clears at the price cap, but there are scenarios where it clears at “substantially” lower prices, he said Thursday.
Dive Insight:
Electricity consumers across PJM’s footprint will pay $14.7 billion for capacity in the 2025/26 delivery year — the 12-month period that starts June 1 — up from $2.2 billion in the current delivery year. That could, for example, drive up electricity bills in Maryland by 2% to 24%, depending on location, according to a mid-August report from the state’s ratepayer advocate.
And the 2026/27 auction could drive up electric bills further, according to the Morgan Stanley analysts.
When combined with PJM’s last capacity auction, the next auction could increase residential electricity bills by roughly 20%, according to the analysts. “It would also likely increase political risk given yet another increase in customer bills — potential for reregulation initiatives, subsidized generation, or restrictions on certain new load like data centers,” they said.
PJM’s forecast peak load for the 2026/27 delivery year increased 2.2%, or 3,314 MW, to 157,197 MW compared to the last base residual auction, according to the auction parameters.
Also, PJM’s installed reserve margin — excess capacity needed to ensure the grid operator has enough power supplies if there are unexpected outages — increased to 18.6% from 17.8%.
Ultimately, PJM expects it will need to acquire 147,246 MW in this December’s auction, up nearly 2,800 MW or 1.9% from the last auction. Winning bidders will be required to provide capacity for one year starting on June 1, 2026, about 18 months after the auction is completed.
Morgan Stanley analysts said they doubt there will be enough time for significant amounts of new supply to enter the market given permitting and construction timelines.
Almost every power plant in PJM cleared the last auction, so there was barely any excess capacity in the market, according to the analysts. “If the same plants clear this next auction, we'll see prices spike to nearly $700/MW-d … since there is a shortage of power plant capacity,” they said.
With such tight supply-demand conditions, PJM’s capacity market will be very sensitive to slight changes in power supplies, according to the analysts.
“If there are a few GW of new power plants built, and this offsets any plants that exit due to retirement, prices could potentially swing between $300/MW-d and the [nearly] $700/MW-d maximum,” they said. “Considering these factors, we think there is a strong case that prices clear at $700 given the challenges in bringing significant new power plant capacity online in time (just an [18-month] timeframe).”
New supply could come from demand response resources, reactivations of retired generating units and changes in resource accreditation, according to ESAI’s Niemann. “Capacity comes out of the woodwork when prices are high,” he said.
Even so, capacity prices in the next auction will likely be higher than in the last one unless more supply is able to enter the market than anticipated, Niemann said.
PJM operates the grid and wholesale power markets in 13 Mid-Atlantic and Midwest states and the District of Columbia.
