You might have gotten frantic emails lately about electricity capacity costs increasing in the PJM territory.  I might have already lost you with that sentence, but hold on.

If you live or have a business in this PJM territory, you will be subject to a shock on your electricity bill starting next June.  The whole reason behind this increase involves dispatchable electricity (or lack thereof).

PJM…. Enough With the Acronyms 

First, what is PJM, and where is it?  PJM is an organization that operates the regional electricity grid from northern Illinois (ComEd area) east to New Jersey and Maryland, including the states of Ohio and Pennsylvania.  If you live or operate in these states, read on….

PJM and Capacity Costs 

PJM is responsible for providing reliability to the grid. Simply put, it ensures that we have enough power during times of peak electricity demand (i.e., extremely hot or cold days).

To provide this reliability, PJM operates capacity market. If you buy energy, you might be familiar with capacity charges on your power bill.

PJM conducts an auction each year to set future capacity costs. PJM collects capacity costs from power consumers (you) and pays generators out of this fund for their ability to generate power during these times of high energy usage. This auction sets prices for capacity charges.

PJM just announced the results from the latest capacity auction, which will determine costs for the June 25 to May 26 billing period. These results surpassed every industry estimate and will increase capacity costs for all energy users in this market by 10 to 20 times. This will increase all customer bills by $.015 to $.03/kWh, amounting to 20 to 40% of your overall rate.

Why the Increase?

The first part of the answer to this question concerns electricity demand. Largely due to new data centers and manufacturing automation, demand for electricity is estimated to go up between 3 and 5% per year annually for the next few years. Going forward, there will simply be a greater demand for electricity during periods of peak demand.

Meanwhile, there is a future lack of dispatchable energy resources that can participate in the capacity market.

Okay, What is a Dispatchable Energy Resource? 

Remember that the capacity market (and PJM) pays generators for their ability to produce power during times of high demand.  A dispatchable energy generator is one that can dispatch/produce energy to the grid if called upon to do so, often at a moment’s notice.  These generators participate in the capacity market.

As part of sustainability efforts, the U.S. continues to shut down coal and natural gas-fired power generation plants.

Coal and natural gas generators are dispatchable. Since they have a ready fuel resource, they can simply ramp up electricity production if called upon to do so.

Click Here for the EIA Reports on Energy Generation

Renewable power generators such as solar and wind often replace these generation assets.

The problem?  These assets are NOT dispatchable (without battery technology).  More specifically, there is no guarantee that the sun will be shining or the wind blowing on days of peak energy usage.  So, these generators are not dispatchable and, generally, do not participate in the capacity market.

Click Here for PJM Capacity Auction Press Release

“The auction cleared a diverse mix of resources, including 48% of gas, 21% of nuclear, 18% of coal, 1% of solar, 1% of wind, 4% of hydro, 5% of demand response and 2% from other resources.”

And So?

This is Economics 101.  At the same time that we have greater demand for energy (and capacity—see data centers), we also have less available capacity (less dispatchable resources—see renewables).  Whenever demand exceeds supply, we see price increases.

What Does the Future Hold, and What Can I Do?

Unfortunately, we may have seen just the tip of the iceberg here. Results from the next PJM capacity auction period (June 26 through May 27) will be held and announced in December of this year (2024). There are legitimate worries that the high capacity prices that we just saw may even double for this next planning period. Again, legitimate worries.

Energy consumers, especially those who count electricity as a large budget item, can take a few immediate steps:

  • Participate in Demand Response Programs that pay electricity users for their ability to reduce usage during times of high energy demand. Payment for those programs increased in proportion to capacity price increases;
  • Undertake any energy efficiency measures that you can. If you haven’t converted to LEDs yet, you should do so…tomorrow!
  • Review if onsite solar is a good fit for your location, especially in states with good solar energy incentives.
  • Evaluate your ability to manage your Peak Load. Reducing your load during peak usage (typically the hottest summer days between
    3 pm and 6 pm ET) will reduce your capacity obligation costs.

If you want more specific advice on what you can do, please reach out to our team.