The governors of five states—Illinois, Pennsylvania, Maryland, New Jersey, and Delaware— sent a joint letter recently to PJM Interconnection, the regional electric grid operator that covers all or part of those five states. The governors came together to urge PJM to take swift action in response to a significant increase in electric bills for residents as a result of record-setting capacity prices at PJM’s capacity auction in July.
What is a capacity auction?
PJM is the regional grid operator that covers all or part of Indiana, Kentucky, Michigan, North Carolina, Ohio, Tennessee, Virginia, West Virginia, Illinois, Pennsylvania, New Jersey, Maryland, Delaware, and D.C. 65 million people live in the PJM region.
Grid operators like PJM are responsible for making sure that when you flip a light switch, the light turns on. In order to do that, they need to plan for the future. Each year, PJM holds a capacity auction meant to make sure it has enough power supply resources (i.e. capacity) to meet predicted energy demand three years in the future. By doing this, they can ensure reliability long-term, and keep the risk of blackouts low. At an auction, when resources are lower, PJM pays more to power plants and other resources that commit to being available during peak times or emergencies. Those resources must deliver on demand or else pay steep penalties for not performing as promised.
In the July capacity auction, PJM’s costs for ensuring reliability spiked, rising from $2.2 billion at the previous auction to a whopping $14.7 billion. As a result, electricity bills in the coming capacity year (starting June 1st, 2025) will increase for residents in PJM’s territory.
How much will bills go up?
Consumer electric bills could increase by as much as 30%, but the increased costs that consumers will see on their electric bills will vary significantly by state and individual utility. Additionally, there are a variety of factors that could affect the overall increase that could change before the increase kicks in in June. Some ratepayer advocates and utilities have initial estimates for what the increased bills might look like across the PJM region.
What happened?
There are two major factors to blame for the price increase: the unreliability of gas plants in extreme weather, and an interconnection backlog that has prevented new power plants and renewable energy resources from coming online.
The gas problem
PJM bases its capacity supply on assumptions about the reliability of certain types of resources. Prior to this auction, PJM considered gas plants to be highly reliable. In the wake of winter storm Elliot, however, when PJM experienced significant unplanned outages, it became clear that gas plants are not as reliable in extreme weather as previously assumed (63% of PJM outages during the storm were from gas plants).
PJM reformed its process to more accurately reflect the unreliable nature of gas plants in 2023. It now determines a resource’s reliability based on how the resource can contribute to reliability during times of high blackout risk. The auction in July was the first in which this change came into effect. Gas plants that had been previously rated as 92-95% available were now considered only 62-79% available.
Gas plants are dominant in PJM (43% of its resources are gas, compared to 27% coal, 17% nuclear, and 6% solar, wind, and hydropower combined). As a result, these new reliability ratings had a significant impact, and a previously concealed capacity shortage was revealed.
The interconnection problem
When a developer proposes a new power generator in PJM territory, like a wind or solar farm, that project enters a queue of projects waiting for PJM’s approval to connect to the power grid. This process is called “interconnection.”
PJM has a huge backlog of new projects waiting in the interconnection queue, because almost no new projects have been approved or begun construction since 2020. As of June 2024, there were 157,765 MW of projects submitted to PJM in the previous 49 months, enough to power roughly 125 million homes for a year. But only 1 MW had actually come online. This is primarily due to PJM’s own failures in long-term transmission and interconnection planning. Advanced Energy United, a trade group representing clean energy companies, gave PJM a D- on its interconnection report card, the lowest grade of any grid operator in the country.
Additional challenges
There are several flaws in the design on PJM’s capacity market that cause capacity to be undercounted, raising capacity prices unnecessarily:
- Reliability-Must-Run resources (RMRs) are power plants under special contract to continue operating past their planned retirement date in order to ensure reliability. As it stands, PJM’s RMRs are not required to (and did not) participate in the capacity auction. This causes ratepayers to pay for these resources twice – once to keep them open, and again due to the false lack of supply when they are not included in the capacity market.
- PJM’s current capacity market model does not work well for renewables, which causes them not to participate in the capacity market. PJM discounts the capacity value of renewables based on when they’re unavailable. For instance, solar resources don’t add capacity at night, so they are understandably only paid to perform during the daytime. The problem is that PJM also penalizes renewables in the same way it penalizes other energy sources, based on failure to perform at any time. So even though solar is only paid to be available during the day, it is also penalized for not performing at night. The result is that many renewable energy sources choose not to participate in a capacity market that is rigged against them.
All of these issues are exacerbated by several other, more recent factors. For one, predicted energy demand has increased, primarily due to expected load growth from data centers. PJM also increased their “reserve margin” (the amount of surplus energy supply they want to have at peak times) due to a judgment that there would be a higher risk of extreme weather going forward, and lower confidence in how that weather would affect reliability. Additionally, retirements of coal and older gas plants took 5.7 GW of resources off the market prior to the July auction.
All of these factors came together at the July capacity auction. More accurate gas reliability ratings, combined with coal retirements that could not be replaced with new energy sources due to interconnection issues created a sudden drop in PJM’s supply. At the same time, data center load growth and an increased reserve margin increased projected demand. And on top of all of that, biased market design caused an undercount of existing capacity since some resources opted out of the auction. The result was that the procured supply was only 0.7% higher than the reserve margin, resulting in a seven-fold spike in capacity prices.
PJM’s auction is broken.
The issue is, capacity prices are supposed to change gradually in response to supply/demand changes. Ideally, an increase in capacity prices provides a price signal to spur new development without drastic rate hikes. But the change in gas plant reliability caused a sudden cost increase, and since nothing can get through the interconnection queue, it can’t spur new development.
What can PJM do to fix this?
To be clear, PJM has more than enough energy supply to meet projected demand in the near future. As long as PJM procures enough resources to meet the reserve margin, it will have enough surplus supply to ensure reliability. Even if, in future years, PJM is unable to clear the reserve margin, it should still have more than enough power supply to meet demand, even at peak times. In the event of a gas-fleet failure, the risk of blackouts would be high.
But, as older plants continue to retire and demand continues to grow, PJM will not be able to ensure reliability forever if new projects remain stuck in a years-long queue. And if nothing is done in the short term, capacity prices will continue to go up, causing significant electric bill hikes for PJM customers. There are several steps PJM could take to remedy this situation.
Interconnection reform: Most crucially, PJM needs to reform its interconnection process. There are currently 286.7 GW of new resources sitting in the interconnection queue, which is above and beyond what is needed to re-balance supply and demand and lower capacity prices. These resources just need to be brought online. PJM began implementing interconnection reform in 2023, but its reform maintains many issues from its previous process, and does not fully comply with new interconnection requirements from the Federal Energy Regulatory Commissions (FERC), according to many environmental and clean energy groups.
Transmission planning: PJM also needs a better long-term plan for how to build out transmission lines in order to be able to connect new projects to the grid faster. PJM earned a D+ on Americans for a Clean Energy Grid’s scorecard for transmission planning. FERC also recently issued a new order requiring grid operators to engage in long-term transmission planning. PJM’s long-term planning scenarios need to include state policy goals.
Capacity market reform: Interconnection and transmission reform will allow new resources to come onto the grid. But that will only lower capacity prices if the market rules are reformed so that renewable resources that get connected to the grid actually count as new capacity. 95% of projects in the interconnection queue are renewables. As renewable energy becomes a larger share of PJM’s resources due to coal plant retirements and the much-need transition to clean energy, PJM will need a capacity market model that accurately captures the capacity added by renewables.
Additionally, PJM could require Reliability-must-run resources (RMRs) to participate in the capacity market. A study by the Maryland Office of People’s Counsel shows that including two coal plants with pending RMR contracts in the capacity auction would have lowered capacity prices by $5 billion. PJM proposed delaying its next capacity auction by six months in order to consider changes to its market after several environmental groups and consumer advocates raised this issue. FERC approved the delay in November.
Interconnection reform, market reform, and transmission planning will make the most long-term impact and ensure the grid remains reliable and bills stay lower. There are also changes PJM could make to increase reliability in the short term:
- PJM and state governments could take measures to ensure increased reliability of existing gas plants. A primary driver of the price spike was lower confidence in the reliability of PJM’s gas fleet. Gas failures are often caused by preventable problems, and gas plants can be made more reliable. PJM and states should work together to ensure all existing gas plants are complying with weatherization standards. Additionally, plants with liquid fuel backup perform much more reliably in extreme weather. State governments could take action to encourage existing plants to upgrade to dual fuel systems. Increasing the reliability of PJM’s existing gas fleet could help bring prices down quickly and in a much more effective way than investment in new gas plants.
- PJM could allow new resources to share grid space with existing ones where there is room. Many existing resources on the grid, including wind farms, solar farms, and fossil fuel plants, have more transmission capacity than they need at some times of the day or year. FERC has ordered grid operators to create rules for “surplus interconnection service,” which would allow developers to add things like battery storage to existing plants in order to add capacity without needing a whole new interconnection service or new transmission lines. While many other grid operators have complied, PJM’s rules make it nearly impossible for surplus projects to be approved. Refusal to allow surplus projects to be added removes an opportunity to work around the interconnection backlog, and makes a bad situation worse.
Critically, this problem is not driven by climate or clean energy policy, and adding coal and gas capacity will not solve this problem. Even if every state in the PJM region met their clean energy policy goals, PJM would only be getting 22% of its energy from renewable sources by 2035. For context, Texas’ grid operator, ERCOT, already reliably sources 34% of its energy from renewables. There is no reason that this should cause any PJM state to walk back its clean energy goals.
This is an issue of gas plant unreliability, poor interconnection and transmission planning, and dysfunctional capacity market design. PJM expects 40 GW of primarily market-driven coal and older gas plant retirements by 2030, and predicted load growth will likely continue to rise. PJM must reform its interconnection and transmission processes so that those retirements can be replaced with the 202 GW of clean, renewable energy already waiting in the queue.
