If you manage commercial properties in New Jersey, Pennsylvania, Maryland, Delaware, or the District of Columbia, your electric bills are about to increase significantly, and the culprit is not your utility company's rate case or a hike in natural gas prices. The PJM Interconnection, the regional transmission organization that operates the wholesale electricity market across thirteen states and the District of Columbia, recently conducted a capacity auction that cleared at prices nearly eight times higher than the prior year. This price increase will flow through to retail electricity bills beginning in mid-2026, adding an estimated two to four cents per kilowatt-hour to commercial electricity costs across the PJM footprint.
For a typical office building consuming five hundred thousand kilowatt-hours per year, the capacity cost increase alone will add ten thousand to twenty thousand dollars to the annual electric bill. For a portfolio of twenty such buildings, the impact is two hundred thousand to four hundred thousand dollars per year. These are not hypothetical numbers. They reflect the actual auction clearing price that has already been determined and will be implemented on a defined schedule. Understanding how capacity markets work, why prices spiked, and what options exist for managing the impact is essential for every property manager operating in the PJM region.
What Is the PJM Capacity Market?
PJM Interconnection coordinates the movement of wholesale electricity across a region stretching from New Jersey to Virginia to Illinois, serving approximately sixty-five million people. One of PJM's critical functions is ensuring that enough generation capacity exists to meet electricity demand reliably, including during peak periods when consumption is highest. The mechanism PJM uses to ensure adequate capacity is the capacity market, formally known as the Reliability Pricing Model (RPM).
The capacity market is distinct from the energy market where electricity is bought and sold in real time. The capacity market pays generators to be available to produce electricity when needed, whether or not they are actually running at any given moment. Think of it as an insurance premium: electricity consumers pay generators to maintain the ability to generate power, ensuring that sufficient resources are available during periods of high demand or system stress. This payment is in addition to the energy payment generators receive when they actually produce and sell electricity.
How the Auction Works
PJM conducts a base residual auction three years in advance of each delivery year. In this auction, generators offer to provide capacity at a specified price, and PJM selects the lowest-cost combination of resources needed to meet the reliability requirement. The auction clears at a single price, the marginal cost of the last resource needed to meet the requirement, and all selected resources receive that price. This clearing price is then allocated to load-serving entities (utilities and electricity suppliers) based on their share of peak demand, and ultimately passed through to end-use customers as a component of their electricity bills.
The three-year forward structure means that capacity costs appearing on your bill in 2026-2027 were determined by an auction that took place in 2024-2025. This time lag is important because it means the cost impact is known well in advance, giving property managers time to prepare, even though they cannot avoid the increase.
Why Prices Increased by 800%
The dramatic increase in PJM capacity auction clearing prices reflects several converging factors that reduced available supply while demand remained stable or grew.
Generation Retirements
A significant amount of generation capacity in the PJM region has retired in recent years, primarily coal-fired power plants that could not compete economically with natural gas and renewable generation. These retirements removed dispatchable capacity that the grid relied on during peak demand periods. While new generation has been developed to replace some of this capacity, the pace of retirement has outstripped the pace of replacement, tightening the supply-demand balance in the capacity market.
Renewable Integration Challenges
Solar and wind generation has grown substantially in the PJM region, but these resources receive reduced capacity credits in the auction because their output is variable and not fully available during all peak demand periods. A one-hundred-megawatt solar farm might receive a capacity credit of only fifteen to twenty megawatts, reflecting the probability that it will be generating during peak demand hours. This means that one hundred megawatts of retired coal capacity cannot be directly replaced by one hundred megawatts of solar capacity for purposes of the capacity market, even though the solar capacity provides significant energy value.
Demand Growth from Data Centers
The explosive growth of data center development in the PJM region, particularly in Northern Virginia, has increased the total demand that the capacity market must serve. Each new hyperscale data center adds fifty to one hundred megawatts of demand that must be backed by capacity resources. The cumulative impact of data center growth on PJM's capacity requirement has been substantial and is projected to continue accelerating.
Rule Changes and Market Design
PJM implemented changes to its capacity market rules that affected the auction outcome. Modifications to how certain resources, particularly demand response and energy efficiency, qualify for participation in the auction reduced the supply of eligible capacity. Additionally, changes to the capacity performance requirements that generators must meet to qualify for capacity payments increased the risk and cost of participation, leading some marginal resources to withdraw from the market.
The combination of retiring generation, limited capacity credits for renewables, surging data center demand, and market rule changes created a perfect storm that drove capacity prices from approximately fifty dollars per megawatt-day to nearly four hundred dollars per megawatt-day, the highest clearing price in the history of PJM's capacity market.
Impact on Commercial Electric Bills: The Math
Capacity costs are passed through to retail electricity customers as a component of their supply charges. The mechanism varies depending on whether the customer buys electricity from the regulated utility or a competitive supplier, but the underlying cost is the same.
How Capacity Costs Appear on Your Bill
For customers purchasing electricity from a competitive supplier (ESCO), the capacity cost is embedded in the supplier's per-kilowatt-hour rate. When capacity costs increase, ESCO contract prices increase accordingly. Customers whose contracts expire before or during the period when higher capacity costs take effect will see the increase reflected in their renewal rates.
For customers on the utility's default supply service, capacity costs are passed through as a component of the basic generation service charge, which is updated periodically (typically quarterly or semi-annually) to reflect current wholesale market costs. The capacity cost increase will flow into these charges on the schedule determined by each utility in the PJM region.
Quantifying the Impact
The capacity cost component of a commercial electricity bill in the PJM region was typically one to two cents per kilowatt-hour under prior auction clearing prices. At the new clearing price, this component will increase to approximately three to six cents per kilowatt-hour, depending on the customer's contribution to system peak demand and the specific utility territory. The net increase of two to four cents per kilowatt-hour represents a fifteen to twenty-five percent increase in the total electricity rate for most commercial customers.
- Small office (100,000 kWh/year): Annual increase of approximately two thousand to four thousand dollars.
- Mid-size office (500,000 kWh/year): Annual increase of approximately ten thousand to twenty thousand dollars.
- Large office or retail (2,000,000 kWh/year): Annual increase of approximately forty thousand to eighty thousand dollars.
- Industrial or warehouse (5,000,000 kWh/year): Annual increase of approximately one hundred thousand to two hundred thousand dollars.
State-by-State Impact Across the Mid-Atlantic
While all PJM states are affected by the capacity auction results, the magnitude of the impact varies by state due to differences in how capacity costs are allocated, the portion of total electricity costs attributable to capacity, and state-specific regulatory treatment.
New Jersey
New Jersey commercial customers will experience among the highest absolute impacts because the state's location in the constrained eastern PJM region results in higher allocated capacity costs. Additionally, New Jersey's relatively high baseline electricity rates mean that the capacity increase compounds on an already expensive electricity supply. Property managers in the PSE&G, JCP&L, and ACE service territories should budget for rate increases of fifteen to twenty percent on the supply component of their bills.
Pennsylvania
Pennsylvania's large and diverse PJM footprint means that impacts vary by utility territory. Properties in the PECO (Philadelphia area) and PPL (eastern PA) territories face similar exposure to New Jersey. Western Pennsylvania properties served by Duquesne Light and West Penn Power may see somewhat lower impacts due to their location in a less constrained zone, but the increases will still be material.
Maryland, Delaware, and DC
Properties in the BGE (Baltimore), Pepco (DC area), and Delmarva Power territories are fully exposed to the PJM capacity cost increase. The compact geography and high load density of the Baltimore-Washington corridor contribute to elevated capacity costs. Property managers in these territories should expect impacts at the higher end of the two to four cents per kilowatt-hour range.
Bill Validation Strategies: Protecting Your Bottom Line
When a cost increase of this magnitude flows through the electricity supply chain, errors and overcharges become more likely. Capacity costs are among the most complex components of a commercial electricity bill, and incorrect allocation is a common billing error that often goes undetected because most property managers do not have the tools or expertise to validate these charges.
Peak Load Contribution Verification
Capacity costs are allocated to individual customers based on their contribution to system peak demand, known as the peak load contribution (PLC) or installed capacity (ICAP) tag. This tag represents the customer's demand during the system's peak hours and is used by the utility or supplier to determine the customer's share of capacity costs. PLC values are typically set annually based on the customer's metered demand during the five highest system peak hours of the prior summer.
Property managers should verify that their PLC tags are accurate. Errors in PLC assignment, which can result from meter reading mistakes, incorrect customer classification, or failure to update tags when a customer's demand profile changes, can result in over-allocation of capacity costs. A PLC error of even ten percent can add thousands of dollars to annual capacity charges for a large commercial customer. Request your PLC data from your utility or ESCO and compare it to your actual demand records during the relevant peak periods.
Supplier Contract Review
If you purchase electricity from a competitive supplier, review your contract to understand how capacity costs are passed through. Some contracts include a fixed capacity component that may not reflect the current auction clearing price. Others pass through capacity costs at actual market prices, which means your costs will increase when the new auction results take effect. Understanding the capacity cost treatment in your existing contract is essential to forecasting your costs accurately and negotiating favorable terms at renewal.
Load Management for PLC Reduction
Because capacity costs are allocated based on peak demand contribution, reducing your building's demand during system peaks can directly reduce your capacity cost allocation in future years. PJM's system peaks typically occur during hot summer afternoons when air conditioning demand is highest. Buildings that can reduce their electrical demand during these peak hours, through pre-cooling, load shedding, or on-site generation, can lower their PLC tag and reduce capacity charges.
Looking Forward: Will Capacity Prices Stay This High?
The unprecedented capacity auction clearing price has prompted debate about whether the result is an anomaly or a structural shift. Several factors suggest that elevated capacity prices will persist for at least several auction cycles.
Generation retirements are expected to continue, as additional coal plants and some older natural gas facilities reach the end of their economic life. New generation development, while accelerating, faces its own challenges including permitting delays, supply chain constraints, and interconnection queue backlogs that extend the timeline from project initiation to commercial operation. Data center demand growth shows no signs of abating, and the electrification of transportation and heating will add additional load growth over the medium term.
PJM and its stakeholders are examining potential market design changes that could moderate future auction results, including modifications to how demand response and renewable resources participate in the capacity market, changes to the demand curve used to set the capacity requirement, and improved coordination between generator retirement timelines and replacement resource development. However, any rule changes will take time to implement and may not produce materially different results in the near term.
For property managers, the prudent planning assumption is that capacity costs will remain elevated for the foreseeable future. Budgets should reflect the higher cost levels, energy procurement strategies should account for the capacity component, and capital investments in efficiency and demand management should be evaluated against a backdrop of structurally higher electricity costs. The PJM capacity market is sending a clear price signal: electricity in the Mid-Atlantic is going to cost more, and the increases will take effect on a known, predictable schedule. Property managers who prepare now will be far better positioned than those who are surprised when the higher bills arrive.