PJM's recent capacity auction resulted in huge price spikes in the cost of supplying power to electric customers in the PJM region for the 2025-2026 year. It was directly caused by the actions of PJM and FERC. These entities aren't protecting ratepayers, they are harming them! Let me explain...
PJM holds annual capacity auctions to secure the provision of electricity three years in advance. A capacity auction is not actual electricity, it is a promise from a generator to supply a certain amount of energy at a future point in time. This is how PJM ensures that it will have enough electricity supply available three years from the auction. PJM is paying these generators to be available to produce energy when needed during the auction year. PJM starts by announcing a certain amount of electricity is needed for the auction year. Generators submit bids of how much it will cost to be standing by to produce that electricity during the auction year. PJM stacks the bids by price, and each bid is represented by an amount of electricity and a price. PJM then looks at its bid stack and finds the place where the capacity need is met. Whatever the price of that bid is the clearing price for all the capacity bids lower in the stack. Those bids that go over the capacity price are not accepted. At the end of the auction, PJM has a stable of committed generators sure to provide the power when needed 3 years from the auction date.
PJM does not order generation. Generation is a market construct, where generators build when the capacity prices are profitable. If the clearing price at auction is high, it would entice the development of new generation. If the clearing price is low, many generators may not have enough revenue to continue to operate at a profit. This is how PJM manages generation to make sure there is always enough, but not too much. The auction serves as an important warning bell... when clearing prices are high, it means more generation needs to be built. The auction sends a signal to generators to build more when the prices are high. More generators lowers prices because there is more competition in the supply. But what happens when the prices are high at the auction and no new generators get built? That's exactly what just happened... there is a dearth of needed generation in PJM so prices shot through the roof to record highs.
The problem here began with PJM making a proposal to change the parameters of its auction. In order to do so, it needed FERC's permission. A battle broke out at FERC, with many other parties objecting to the auction changes. FERC moves at a snail's pace and can take years to make a decision on a request. The more parties to a case, the longer it takes to resolve it.
Because of the battle going on at FERC, the auctions got put on hold. As Power magazine says,
PJM holds annual capacity auctions to secure the provision of electricity three years in advance. A capacity auction is not actual electricity, it is a promise from a generator to supply a certain amount of energy at a future point in time. This is how PJM ensures that it will have enough electricity supply available three years from the auction. PJM is paying these generators to be available to produce energy when needed during the auction year. PJM starts by announcing a certain amount of electricity is needed for the auction year. Generators submit bids of how much it will cost to be standing by to produce that electricity during the auction year. PJM stacks the bids by price, and each bid is represented by an amount of electricity and a price. PJM then looks at its bid stack and finds the place where the capacity need is met. Whatever the price of that bid is the clearing price for all the capacity bids lower in the stack. Those bids that go over the capacity price are not accepted. At the end of the auction, PJM has a stable of committed generators sure to provide the power when needed 3 years from the auction date.
PJM does not order generation. Generation is a market construct, where generators build when the capacity prices are profitable. If the clearing price at auction is high, it would entice the development of new generation. If the clearing price is low, many generators may not have enough revenue to continue to operate at a profit. This is how PJM manages generation to make sure there is always enough, but not too much. The auction serves as an important warning bell... when clearing prices are high, it means more generation needs to be built. The auction sends a signal to generators to build more when the prices are high. More generators lowers prices because there is more competition in the supply. But what happens when the prices are high at the auction and no new generators get built? That's exactly what just happened... there is a dearth of needed generation in PJM so prices shot through the roof to record highs.
The problem here began with PJM making a proposal to change the parameters of its auction. In order to do so, it needed FERC's permission. A battle broke out at FERC, with many other parties objecting to the auction changes. FERC moves at a snail's pace and can take years to make a decision on a request. The more parties to a case, the longer it takes to resolve it.
Because of the battle going on at FERC, the auctions got put on hold. As Power magazine says,
BRA auctions are usually held three years in advance of the delivery year. While the 2025/2026 auction was originally scheduled to be held in May 2022, it was suspended while the Federal Energy Regulatory Commission (FERC) considered the approval of new capacity market rules. The recent July 2024 auction stems from a compressed schedule that aims to return to the three-year forward basis. According to PJM, the next BRA—for the 2026/2027 delivery year—is scheduled for December 2024.
FERC suspended PJM's capacity auctions while it resolved the issue. That's like turning off the warning system. PJM's annual capacity auction couldn't send the market signal to build new generation because it wasn't being held.
During this time, an extreme change in the power needs of the PJM region was underway. Many baseload fossil fuel generators closed, either the result of the last auction's low capacity prices, or because they were "dirty" and no longer socially acceptable. The new generation that entered the market could not keep up with the amount of generation that was closing. As a result, we had less generation available. Also during this time, the building of new data centers and increasing power demands for AI shot through the roof. No new generation to supply power for these data centers was proposed or built because PJM's auction warning bell was not sounding due to the auctions being suspended.
PJM used the only tool it had available to meet regional need... transmission. PJM conducted a competitive transmission window to connect the remaining generators with the new data center load. Unfortunately, the majority of the available generators are located in WV and PA, and the data center load is in Northern Virginia. PJM asked for new transmission to connect the two, and it ended up with a whole bunch of new projects, including MARL and MPRP. PJM says they are "needed" to supply power to the data centers because no new generation has been built anywhere near the data centers.
Now that FERC has finally resolved the issue and PJM has its new market parameters, PJM recently began holding auctions again. The first new auction for the 2025-2026 year was held just 10 months before the auction year begins, instead of 3 years in advance. There's no way new generators can be built in 10 months, even if the prices are generous enough to support them economically. That's why the auction is always held 3 years in advance, in order to give time for new generation to be built to reduce auction prices.
Instead, we're looking at a transmission bandaid to keep the existing generation flowing to the places that need it. And PJM has opened another transmission planning window to add another 4,500MW of generation imports to Northern Virginia because there is no generation currently proposed to fill that need.
Eventually, if PJM's market signal works as intended, new generation will be built near the load. However, certain states like Virginia and Maryland have passed laws that prevent the building of new fossil fuel generation. That leaves only the nuclear option to supply the outrageous amount of power needed by the data centers. Can you imagine how long it would take to build a new nuclear plant in Northern Virginia? It would be completed on the 12th of Never. Meanwhile, transmission is the only viable option.
PJM's market system didn't work to get generation built in time to meet new need because PJM and FERC had turned it off and were asleep at the switch. Now we have a disaster of epic proportions on our hands.
What's going to happen first? The construction of hotly opposed transmission projects, or the building of new generation? And where will that generation be built? Continuing to build in PA and WV only perpetuates the transmission problem. We need new generation at load. It's probably cheaper than billions of dollars of new transmission, but it takes a willingness to sacrifice for its own benefit on the part of the data center loving states.
New generation is coming to market... and how much of it will obviate the need for new transmission? That's an unknown at this point, but it's going to happen. PJM's transmission project needs will change and fall apart. Let's hold the line, folks! This battle is far from over!
During this time, an extreme change in the power needs of the PJM region was underway. Many baseload fossil fuel generators closed, either the result of the last auction's low capacity prices, or because they were "dirty" and no longer socially acceptable. The new generation that entered the market could not keep up with the amount of generation that was closing. As a result, we had less generation available. Also during this time, the building of new data centers and increasing power demands for AI shot through the roof. No new generation to supply power for these data centers was proposed or built because PJM's auction warning bell was not sounding due to the auctions being suspended.
PJM used the only tool it had available to meet regional need... transmission. PJM conducted a competitive transmission window to connect the remaining generators with the new data center load. Unfortunately, the majority of the available generators are located in WV and PA, and the data center load is in Northern Virginia. PJM asked for new transmission to connect the two, and it ended up with a whole bunch of new projects, including MARL and MPRP. PJM says they are "needed" to supply power to the data centers because no new generation has been built anywhere near the data centers.
Now that FERC has finally resolved the issue and PJM has its new market parameters, PJM recently began holding auctions again. The first new auction for the 2025-2026 year was held just 10 months before the auction year begins, instead of 3 years in advance. There's no way new generators can be built in 10 months, even if the prices are generous enough to support them economically. That's why the auction is always held 3 years in advance, in order to give time for new generation to be built to reduce auction prices.
Instead, we're looking at a transmission bandaid to keep the existing generation flowing to the places that need it. And PJM has opened another transmission planning window to add another 4,500MW of generation imports to Northern Virginia because there is no generation currently proposed to fill that need.
Eventually, if PJM's market signal works as intended, new generation will be built near the load. However, certain states like Virginia and Maryland have passed laws that prevent the building of new fossil fuel generation. That leaves only the nuclear option to supply the outrageous amount of power needed by the data centers. Can you imagine how long it would take to build a new nuclear plant in Northern Virginia? It would be completed on the 12th of Never. Meanwhile, transmission is the only viable option.
PJM's market system didn't work to get generation built in time to meet new need because PJM and FERC had turned it off and were asleep at the switch. Now we have a disaster of epic proportions on our hands.
What's going to happen first? The construction of hotly opposed transmission projects, or the building of new generation? And where will that generation be built? Continuing to build in PA and WV only perpetuates the transmission problem. We need new generation at load. It's probably cheaper than billions of dollars of new transmission, but it takes a willingness to sacrifice for its own benefit on the part of the data center loving states.
New generation is coming to market... and how much of it will obviate the need for new transmission? That's an unknown at this point, but it's going to happen. PJM's transmission project needs will change and fall apart. Let's hold the line, folks! This battle is far from over!
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