The Hidden Cost of Electricity: What "Capacity Prices" Mean
When you flick a switch to turn on an air conditioner or a lamp, you draw power from your electric utility, such as PECO in Philadelphia. That electric utility in turn draws its power from a larger grid. In our area that’s PJM Interconnection, which originally distributed electricity across Pennsylvania, New Jersey, and Maryland, and has grown larger since. A grid operator, ideally, supplies as much electricity as people need. During heat waves or cold spells, our need for electricity will surge.
This year, the process for pricing this surge power capacity has gone awry. This is due to a ‘generator-to-grid’ auction that happened last summer which will add about 10% to retail electric power costs across our area¹, above a 10% price increase already approved by the Pennsylvania Public Utility Commission. These capacity auctions set a price for electric power put on the grid at times of highest use, its “capacity price”. So we will pay higher prices from June 2025 to May 2026.
A month ago, Pennsylvania’s Governor Shapiro initiated a regulatory complaint² contending that the auction process was flawed and that $14 billion of surplus profits would flow from customers to power generators due to this auction process. Three more state governors, nine state utility commissions, ratepayer advocates and others supported this complaint that sought to lower the PJM Interconnection’s capacity auction price cap. A settlement was reached on January 28, 2025. The settlement avoids an estimated $200.00 per household addition to annual power costs, beginning next year. Unfortunately, this agreement is too late to help us this coming year, it will be an expensive summer.
PJM Interconnection Inc. operates the power grid across 13 States:
Map of PJM Interconnection area: from PA to NC, and IL to NJ. PECO is labeled in purple.
Understanding Capacity Prices: In utility regulation and pricing, delivery of “capacity” is the cost to each Electric Distribution Company (like PECO) of having the right to demand more power be generated at a time in the future – a day ahead or 15 minutes ahead – in order to supply all expected customer demand. Utilities can estimate closely what is going to be needed in periods of extremely high demand: midsummer hot spells, mid-winter cold snaps, and other demand events. These auctions allow them and the generators to plan ahead – at least for a year.
In practice, despite the recent trends for higher levels of demand for power in PJM, with a slow rate of approval of new generation units (solar, wind, storage) by PJM, one year’s price for capacity has not prompted the building of enough new generation capacity.
The 2025/2026 auction produced record-high capacity prices that will cost ratepayers across the grid operator’s footprint $14.7 billion for the delivery year that begins in June 2025, up from $2.2 billion in the previous auction. The auction secured resources to meet PJM's reliability requirements, but the prices were notably higher due to several factors.³
According to PJM, key factors driving higher prices were:
Decreased Supply: A substantial number of generator retirements reduced the electricity supply entering the auction
Increased Demand: The forecasted peak load for the 2025/2026 Delivery Year increased from 150,640 MW to 153,883 MW (up 2.2%)
Market Reforms: FERC-approved market reforms, including improved reliability risk modeling for extreme weather, have tightened the supply-demand balance
Higher capacity prices translate to increased electricity costs for end users across PJM.
However, consumer advocates point to another cause for insufficient capacity: “PJM is not connecting new energy to the grid fast enough.”⁴ They cite slow interconnection permission for 3000 renewable energy projects as a reason for this year’s shortfall. There is truth in this: PJM ‘paused’ approvals for new interconnection in 2022, faced with overwhelmingly more generation proposals than it had engineers to review. Solar and wind are much quicker to build, so more rapid approvals could bring relief in 2-3 years, vs 4-5 years for gas generator plants.
The Shapiro complaint pressed for solutions that address increasing costs, urging PJM to:
Reopen their closed interconnection queue to get new projects online;
Rely on member states to help determine which projects are ready and to speed up project approvals;
Implement new best practices established by FERC to be better prepared in extreme weather scenarios and ensure affordable, reliable power year-round; and
Lower capacity price caps, among other reforms
Shapiro’s complaint lowered the PJM Interconnection’s capacity auction price cap, according to filings with the Federal Energy Regulatory Commission.⁵ The dispute over lowering the capacity auction price cap is part of a series of actions agreed with PJM.
Shapiro and Pennsylvania contend that generating companies won’t be able to bring new power supplies online to respond to higher capacity prices for at least several years, making those high prices unjust and unreasonable.
Unfortunately, according to the governor’s office, this agreement will not affect the higher costs coming this June, but will lower bills beginning mid-2026.
This is written with PECO customers in mind, but similar price effects will happen for all PJM-located-utility customers.