Analyzing the PJM Capacity Auction: What it means for Commercial & Industrial energy users

This week marked a major moment for those in the energy procurement world: the annual PJM capacity auction, in which generators offer their capacity resources to meet consumption needs of residents and businesses across 13 states and DC. The results are in — and for the second year in a row, prices are at or near record highs. This auction cleared at the recently introduced FERC-approved cap of $329.17/MW-day (UCAP) for the entire footprint.

These results underscore “the region’s tightening supply-demand balance,” as PJM shared. This isn't just a blip, it's part of a broader trend of lower reserves and higher reliability risk across the US — so it's essential for C&I customers to understand the impact and how to strategically manage these growing expenses.

What is the PJM Capacity Auction?

PJM Interconnection is the largest power grid operator in the US, serving 65 million customers and coordinating the movement of electricity from New Jersey to Chicago. The PJM capacity auction incentivizes enough resources to be available to produce electricity when called upon to ensure reliability. Last year's auction saw record-high prices, and this year has followed suit, signaling that generation development continues to not keep pace with increasing demand.

How do capacity prices impact C&I utility bills?

For C&I customers, capacity costs have become an increasingly significant portion of their electricity supply bill, and many are now seeing these charges realized from last year’s record-setting auction. These charges are allocated to customers based on each customer’s usage during the five highest consumption hours of PJM during the prior year.

Why are prices rising?

This trend of elevated capacity prices isn't isolated to PJM. We're seeing similar record highs in other markets, like the Midwest ISO (MISO), which held its capacity auction in April. Higher capacity prices are the realization of rapidly increasing demand that has exceeded the pace of new generation development:

• Demand Tailwinds: After more than a decade of little change, US consumption is rising again. This has been driven by the build-out of data centers, increased manufacturing, and the electrification of everything, including transportation.
• Supply Headwinds: New generation has been developed but stalled by interconnection delays and costs, local opposition and permitting, tariffs on components, and the challenges of financing new projects.

What Can C&I Customers Do?

In this new environment of higher and more volatile capacity prices, C&I customers need proactive strategies to manage their costs effectively. Arcadia offers several ways to support businesses through these changes:

1. Understanding your exposure: The first step is awareness. Knowing how capacity costs impact your overall energy bill is crucial for accurate forecasting and budgeting. Arcadia can audit your utility bills and existing retail supply contracts to help you understand your current exposure to capacity costs.

2. Optimizing your retail supply contract: Your retail supply contract structure plays a significant role in how capacity costs are charged to you. If you’re aiming to reduce these charges, Arcadia's procurement offering can help you solicit retail energy providers and structure your supply contract to allow you to benefit from your actions.

3. Reducing load during peak hours: If you have the flexibility to reduce your consumption during a handful of hours during the year, you can reduce your share of next year’s capacity costs. Arcadia (together with our partners) can provide signals as to when the system peaks would likely occur — giving you the tools to take an active role in reducing your capacity costs for next year.

A data-driven approach to Energy Procurement

The rising prices in PJM and other capacity markets underscore the importance of a data-driven and transparent approach to energy procurement strategies. This isn't just about managing a single cost component — it's about building resilience into your energy strategy.

Arcadia is committed to helping C&I customers navigate this "new normal" by providing the insights, tools, and expertise needed to understand, manage, and ultimately reduce their capacity costs.