Catalyst with Shayle Kann: Episode Summary – "PJM and the Capacity Crunch"

Release Date: July 31, 2025
Host: Shayle Kann, Energy Impact Partners
Guest: Steve Piper, Research Director for North American Power and Renewables at S&P Global

1. Introduction

In this episode of Catalyst, Shayle Kann delves deep into the pressing issues surrounding the electricity market, focusing on the PJM Capacity Auction and its broader implications. The conversation with Steve Piper sheds light on the complexities of capacity markets, the surge in capacity prices, and the ensuing effects on consumers and the energy sector.

2. Understanding the PJM Capacity Auction

Shayle Khan introduces the topic by emphasizing the significance of the PJM Capacity Auction, referring to it as the "Woodstock for Electricity Nerds."

Key Points:

• Capacity Market Purpose: Designed to signal the need for reliable electricity capacity, encouraging investment in new power generation.
• PJM's Role: As the grid operator for the Mid-Atlantic region, PJM oversees one of the most critical capacity markets in the U.S., encompassing areas like Northern Virginia, a major data center hub.

Notable Quote:

Steve Piper [04:22]: "The concept of electric restructuring was to bring private investors into the energy markets, introducing new generation technologies and applications previously managed by regulated utilities."

3. Mechanics of the Capacity Auction

Steve Piper explains the foundational structure of the capacity auctions, highlighting PJM's historical approach and recent shifts.

Key Points:

• Four-Year Forward Auction: Traditionally, PJM conducted auctions four years in advance, allowing developers ample time to bring new capacity online.
• Bidding Process: Generators bid a price for their capacity, which PJM stack ranks from lowest to highest to determine the clearing price based on demand curves.
• Recent Shift: Due to regulatory and market pressures, PJM has compressed the auction timeline to procure capacity for the upcoming year instead of four years ahead.

Notable Quote:

Steve Piper [06:47]: "PJM was essentially saying, what are we bid to build new capacity four years from now?"

4. Surge in Capacity Prices

The discussion transitions to the dramatic increase in capacity prices over the past few years, spotlighting the factors contributing to this surge.

Key Points:

• Historical Prices: Early 2010s saw prices around $100 per megawatt-day.
• Recent Trends: Last year's clearing price was approximately $270 per megawatt-day, with the latest auction exceeding this figure.
• Price Caps: To mitigate consumer impact, PJM set a price cap at $329 per megawatt-day, which the latest auction reached.

Notable Quotes:

Shayl Khan [15:35]: "The pricing in the early 2000s was maybe around $100 per megawatt day... last year's clearing price was closer to $270 per megawatt day."

Steve Piper [16:27]: "PJM reached a settlement with the state of Pennsylvania to put a new price cap in place at about $329 per megawatt day."

5. Implications for Resource Adequacy

Shayle and Steve explore the concept of resource adequacy, questioning whether the current signals indicate a looming capacity crunch.

Key Points:

• Red Flag Indicators: The significant increase in capacity prices serves as an economic signal that existing and new generation may not keep pace with rapidly growing demand.
• Economic Impact: Higher capacity prices translate directly to increased costs for consumers, manifesting as higher utility bills.
• Auction Timeline Compression: The shift from a four-year to a one-year procurement timeline exacerbates the challenge of scaling new capacity swiftly.

Notable Quote:

Steve Piper [20:53]: "You would have to call it a red flag... this is an economic event."

6. Impact on Retail Prices

The surge in capacity prices doesn't remain confined to wholesale markets; it flows downstream, affecting retail electricity rates.

Key Points:

• Consumer Bills: Customers in regions like Ohio, Pennsylvania, and Maryland are experiencing significant monthly bill increases due to elevated capacity prices.
• Utility Pass-Through: Utilities are mandated to transfer the costs of capacity procurements directly to consumers, leading to higher retail rates.

Notable Quote:

Steve Piper [31:25]: "It flows right into the retail rates. The utilities that serve the customers have to pay those bills and they have to pass those bills through."

7. Demand Response Participation

The role of demand response and other flexible resources in capacity markets is scrutinized, especially given their potential to swiftly adapt to capacity needs.

Key Points:

• Current Contributions: Despite high capacity prices, recent auctions have seen a decrease in demand response participation.
• Qualification Challenges: PJM's conservative assessments of demand response's reliability value (counting 60-70% of bid capacity) deter widespread participation.
• Industry Adaptation: Uncertainties around regulation and the evolving landscape of distributed resources hinder the growth of demand response initiatives.

Notable Quote:

Steve Piper [24:45]: "There's probably a period of adaptation before you see a lot of growth in demand response."

8. National Perspective and Other ISOs

The issues observed in PJM are not isolated; similar trends are emerging across various Independent System Operators (ISOs) nationwide.

Key Points:

• Widespread Revisions: ISOs like New York, New England, and California are reassessing the reliability contributions of wind, solar, and storage, typically assigning lower values to these resources.
• Increased Reserve Margins: Most ISOs are elevating their target reserve margins, compelling a greater procurement of capacity.
• Conventional Generation Scrutiny: Traditional power sources, including gas and coal, are facing heightened evaluation post-events like winter storms.

Notable Quote:

Steve Piper [27:57]: "Every ISO has basically done two things that are noteworthy. One is they've revised the reliability contributions, particularly of wind, solar, and storage... and they've also said pretty uniformly we want a higher target reserve margin."

9. Conclusion

The episode underscores a pivotal moment in the U.S. electricity market, where capacity auctions and their resultant pricing are signaling potential strains in resource adequacy. The compression of auction timelines, coupled with increased capacity prices, not only raises concerns about meeting future demand but also has tangible repercussions for consumers through elevated retail electricity costs. While demand response and renewable resources offer avenues for flexibility, regulatory uncertainties and conservative reliability assessments are limiting their effective deployment. As these dynamics unfold across various ISOs, the electricity market faces the dual challenge of ensuring reliability while managing economic impacts on both the supply side and consumers.

Final Notable Quote:

Shayl Khan [31:33]: "That's us up, which means retail prices can also only go. At least this component of retail prices can only go in one direction, which is up."

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