What Happened in the PJM Capacity Auction
The PJM Interconnection operates the largest wholesale electricity market in the United States, coordinating the generation, transmission, and delivery of electricity across 13 states and the District of Columbia, serving approximately 65 million people. PJM's capacity market, known as the Reliability Pricing Model, conducts an annual auction three years in advance to ensure that sufficient generation resources will be available to meet projected peak demand. The auction results for the 2025-2026 delivery year sent shockwaves through the commercial real estate industry when the clearing price increased by approximately 800 percent compared to the previous auction cycle.
The Base Residual Auction for the 2025-2026 delivery year cleared at $269.92 per megawatt-day across much of the RTO, compared to $28.92 per megawatt-day in the prior auction. This unprecedented increase reflects a convergence of structural factors including the retirement of coal and older natural gas generation, delays in new generation interconnection, tightening reserve margins, and reforms to the auction rules that more accurately price reliability risk. For commercial building operators across the PJM footprint, this capacity cost increase is now flowing into electricity bills as a line item that many property managers have never had to scrutinize before.
Understanding the PJM Footprint
The PJM capacity auction affects commercial electricity rates across a vast territory that includes all or parts of Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia, and the District of Columbia. The commercial property types most heavily impacted include office buildings, retail centers, data centers, warehouses, and industrial facilities with substantial electricity consumption that operates primarily during the peak hours when capacity costs are most relevant. Any commercial building within the PJM territory that consumes electricity is exposed to this cost increase, regardless of whether the building procures electricity from the local utility or through a competitive retail supplier.
How Capacity Costs Flow Into Commercial Bills
Capacity costs represent the price that the market pays to ensure generation resources are available when needed, separate from the energy costs associated with actually generating and consuming electricity. These costs are allocated to load-serving entities, including utilities and competitive suppliers, based on their customers' contribution to peak demand during specific hours defined by PJM. The load-serving entity then passes these costs through to commercial customers as part of the electricity supply rate.
For commercial buildings on standard utility tariffs, capacity costs are typically embedded in the generation component of the bill and may not appear as a separate line item. For buildings purchasing electricity through competitive retail suppliers in deregulated markets, capacity costs are either included in the fixed supply rate or passed through separately depending on the contract structure. The critical distinction is between fixed-price contracts that were locked in before the auction results were known and contracts that expose the customer to capacity cost adjustments at the time of delivery.
A 300,000-square-foot office building in Philadelphia consuming 6 million kilowatt-hours annually faces an estimated capacity cost increase of $45,000 to $65,000 per year based on the new auction clearing price. For a portfolio operator managing 20 similar properties across the PJM footprint, the aggregate impact can exceed $1 million annually in additional electricity costs that were not reflected in budget projections developed before the auction results were published.
Locational Differences Within PJM
Capacity costs within PJM are not uniform across the entire footprint. The auction includes Locational Deliverability Areas that can clear at different prices depending on local supply and demand conditions and transmission constraints. Historically, congested zones like the EMAAC region covering New Jersey and parts of eastern Pennsylvania have cleared at premiums above the RTO-wide price. The MAAC zone covering the broader Mid-Atlantic has also commanded premiums, while western PJM zones including parts of Ohio and Indiana have sometimes cleared at lower levels. Commercial operators with properties in multiple PJM zones need to understand the locational pricing differences to accurately project capacity cost exposure by building.
Why Capacity Prices Increased So Dramatically
The 800 percent increase in PJM capacity auction clearing prices was not caused by a single factor but by the intersection of several structural shifts in the electricity market that had been building for years. Understanding these drivers helps commercial operators assess whether the high prices are likely to persist or moderate in future auction cycles.
- Generation retirements have outpaced new builds.Over the past decade, PJM has seen the retirement of approximately 40 gigawatts of coal-fired generation and older natural gas plants that could not compete economically with newer gas turbines and renewable energy. While new solar, wind, and gas generation has been developed, the pace of new capacity additions has not fully replaced the retired megawatts, particularly dispatchable capacity that can ramp up during peak demand events.
- Interconnection queue delays have constrained supply.PJM's interconnection queue, the pipeline through which new generation projects connect to the grid, has grown to over 2,600 projects representing more than 300 gigawatts of potential capacity. However, processing delays, study backlogs, and transmission upgrade requirements mean that only a fraction of queued projects achieve commercial operation within their projected timelines.
- Auction rule reforms tightened eligibility. PJM implemented reforms to its capacity market rules that restricted the ability of certain resource types, including demand response and some renewable resources, to participate at the same capacity credit levels as dispatchable thermal generation. These reforms reduced the total supply offered into the auction, pushing clearing prices higher.
- Growing demand from data centers and electrification.Peak demand projections within PJM have been revised upward to account for data center construction, electric vehicle charging infrastructure, and building electrification trends that are adding new load to the system faster than previously forecasted.
Impact on Contract Renewals and Procurement Strategy
Commercial building operators who are renewing electricity supply contracts in 2026 are seeing the elevated capacity costs reflected in every offer they receive. Fixed-rate supply contracts that were available at 7 to 9 cents per kilowatt-hour in the PJM territory two years ago are now pricing at 10 to 14 cents per kilowatt-hour, with the capacity cost increase accounting for a significant portion of the difference. For buildings with contracts expiring in the current delivery year, the renewal shock can be substantial.
The procurement strategy implications are significant. Buildings on fixed-rate contracts that were locked in before the auction results are currently shielded from the increase but will face it at renewal. Buildings on variable or indexed contracts are seeing the increase flow through in real time. The forward capacity market suggests that prices may moderate somewhat in future delivery years as new generation comes online and demand response resources return to the market under revised rules, but few market participants expect a return to the sub-$50 per megawatt-day levels that prevailed in previous years.
Contract Structure Considerations
Given the elevated capacity cost environment, commercial operators should evaluate their contract structure options carefully. A fixed-rate contract that bundles capacity costs into a single all-in rate provides budget certainty but may embed a risk premium that overstates actual capacity costs. A contract that passes through capacity costs separately provides transparency and may result in lower total costs if capacity prices moderate in future auction cycles, but exposes the building to upside risk if prices remain elevated or increase further. A hybrid approach that fixes the energy component and indexes the capacity component provides a middle ground that limits exposure while maintaining some flexibility.
Operational Strategies to Mitigate Capacity Cost Exposure
Because capacity costs are allocated based on a building's contribution to peak demand during specific PJM peak hours, commercial operators can reduce their capacity cost allocation by managing load during the critical intervals that set their peak load contribution. PJM uses the five highest peak hours during the summer months to determine each customer's Peak Load Contribution, the metric that drives capacity cost allocation for the following delivery year.
- Monitor PJM peak load alerts. PJM issues alerts when system-wide demand is expected to approach peak levels. Building operators who can reduce consumption during these specific hours lower their PLC and reduce their capacity cost allocation for the following year.
- Pre-cool buildings before peak hours. Running cooling systems at full capacity during morning off-peak hours and allowing temperatures to drift slightly upward during the afternoon peak window reduces demand during the critical interval without materially affecting occupant comfort.
- Stagger equipment startup. Avoid simultaneous startup of major electrical loads during peak hours. Sequential startup of HVAC compressors, elevators, and other large loads flattens the demand profile and reduces the building's contribution to coincident peak.
- Participate in demand response programs. PJM operates demand response programs that compensate commercial customers for curtailing load during emergency conditions. Revenue from demand response participation directly offsets capacity costs.
- Evaluate behind-the-meter battery storage. Battery systems that discharge during PJM peak hours can reduce the building's PLC and generate demand charge savings simultaneously, stacking value streams that improve the battery investment's total return.
What to Expect Going Forward
The PJM capacity market is entering a period of structural adjustment that will keep capacity costs elevated relative to historical norms for the foreseeable future. The combination of continued generation retirements, growing demand from electrification and data centers, interconnection queue constraints, and evolving auction rules creates a tighter supply-demand balance that supports higher clearing prices. While individual auction results will vary, commercial building operators should plan for capacity costs that are materially higher than the levels they experienced prior to the 2025-2026 delivery year auction.
The buildings that will manage this cost increase most effectively are those with real-time visibility into their consumption patterns, proactive procurement strategies that account for capacity cost exposure, and operational flexibility to reduce demand during the peak hours that drive capacity cost allocation. A centralized utility management platform that tracks interval consumption data, monitors PJM market conditions, and models the financial impact of capacity cost changes across a portfolio of buildings provides the foundation for informed decision-making in an increasingly complex and expensive electricity market.