Post: Q&A: PJM’s capacity pricing surge and what it means for businesses

Q&A: PJM’s capacity pricing surge and what it means for businesses

PJM’s latest capacity auction for delivery year 2025–26 marked a dramatic shift in cost, with clearing prices jumping ninefold. In this article we speak with GridBeyond’s Head of North America Demand Response, Kelly Lorincz to explore what caused the increases and what businesses can do to mitigate the impacts.

What happened in the latest PJM capacity auction?

PJM’s 2025–26 capacity auction saw a dramatic increase in prices, with clearing prices jumping nearly 9 times higher than the previous year. Prices soared from around $11,000–$27,000 per MW-year to nearly $99,000–$170,000 per MW-year, depending on location.

There were two main reasons for this:

1. reduced supply: about 13GW of capacity exited the market, due in large part to the retirement of over 36 GW of fossil-fuel generation since 2013.
2. increased demand: In 2024, PJM’s peak electricity demand hit 152.3GW, the highest since 2013. In addition, PJM changed how it values demand response (DR).

What is demand response, and why is it being devalued?

Demand response refers to reducing electricity usage during peak times to support grid reliability. While it’s a valuable resource, PJM has decided to reduce the credit it gives to DR participants in its capacity market, citing reliability concerns and updated performance expectations.

In May, the FERC approved an expansion of the demand response availability window to allow for 24-hour a day. Previously, DR could only be called upon from 10 AM to 10 PM during the summer and from 6 AM to 9 PM in the winter. This new 24-hour availability will be applied in the capacity auction (BRA) for the 2027-28 delivery year. While the Effective Load Carrying Capability (ELCC) for the BRA 2027-28 will be determined closer to the auction date, there is a general consensus that the extension of the demand response availability will significantly increase the ELCC for this auction and future ones.  

What does this mean for businesses?

For many businesses, the impact will be higher capacity charges, which are a key component of electricity bills. With supply down, demand up, and DR resources discounted, capacity prices have surged. This translates into an average 11% increase in industrial and commercial energy bills, though impacts vary depending on energy supplier and location.

Can businesses do anything to reduce these increased costs?

While the recent spike in auction prices may seem daunting, proactive energy management strategies can help to significantly mitigate these increases.

One of the most effective approaches is to focus on reducing electricity usage during peak demand periods. These high-demand intervals, often occurring during the hottest summer days, are critical in determining a business’s “capacity tag”, essentially the amount of capacity the business is expected to pay for in the following year. By curbing electricity consumption during these few hours, companies can substantially lower future capacity charges. We spoke about this in more detail in a recent white paper.

Another strategy is to participate in demand response programs, such as PJM’s Emergency Load Response Program (ELRP). These programs reward businesses for temporarily reducing their electricity demand during times of stress on the system. By voluntarily curtailing energy use when requested, companies not only support grid reliability but also earn payments that can help offset their rising electricity costs.

Businesses should also revisit their energy supply contracts with a fresh perspective. Capacity costs can be structured differently depending on the type of contract. Some offer fixed rates, while others pass through actual market prices. By evaluating the pros and cons of fixed versus variable pricing, or even renegotiating terms, companies can better align their contract structure with their risk tolerance and cost-saving goals. In some cases, blending different pricing mechanisms across multiple sites or regions may provide the best hedge against future volatility.

What’s the big takeaway for energy managers and CFOs?

While rising capacity prices present a clear challenge, they also offer an opportunity for businesses to take control of their energy strategy.

Higher capacity prices and less favorable treatment for DR mean that businesses need to be more proactive than ever. By understanding their energy profile, optimizing usage during key hours, and participating in revenue-generating programs, organizations can minimize the financial impact.

Through a combination of operational flexibility, participation in grid programs, and smart procurement decisions, organizations can not only cushion the impact of higher costs but also turn their energy usage into a competitive advantage.

How can GridBeyond help?

Essentially GridBeyond works with businesses to transform energy from a cost center to a value stream. Acting as your operational co-pilot, our technology enables energy management and intelligent load control across ancillary and energy markets. Helping businesses cut costs, access new revenue and meet net zero goals, all without sacrificing product output or quality.

By leveraging accurate forecasts up to 7 days ahead, real-time data analysis, advanced machine learning algorithms, and seamless integration into existing plant infrastructure, we use digital twin technology to forecast maximum value strategies and ensure process stability. This allows for the delivery of market-aware optimization and AI-powered process control, that helps avoid price peaks and unlock hidden value in DR, arbitrage, and energy trading.

Whitepaper | Predicting peaks | PJM’s 5CP program 

In this white paper we explore how these charges are assessed and the key role of forecasting in monetizing flexibility for maximum gain/cost reduction. 

Learn more