Understanding the PJM capacity market: ensuring reliable electricity supply

The role of capacity costs in preventing blackouts and ensuring grid stability

The PJM Capacity Market, officially known as the Reliability Pricing Model (RPM), is a vital mechanism designed to maintain a reliable electricity supply across the PJM Interconnection region, which spans 13 U.S. states and the District of Columbia. 

The primary goal of the PJM Capacity Market is to incentivize power generators to commit to being available during periods of peak electricity demand. This ensures that the power grid remains stable and reliable, even during the most challenging times.

Why do capacity costs exist? 

Capacity costs exist to ensure grid reliability. Electricity cannot be stored on a large scale economically (though battery storage is improving), and demand can spike unpredictably. PJM’s capacity market incentivizes power generators to invest in and maintain resources that can meet peak demand, even if those resources are idle for much of the year. This ensures that adequate power generation capacity is in place to prevent blackouts and maintain grid stability during times of high usage, such as heatwaves or cold snaps. 

These capacity costs are allocated to electricity customers based on their contribution to the system’s peak demand, which historically occurs during the hottest days of the summer.

To understand capacity costs, it’s important to distinguish between demand-based (kW) charges and energy-based (kWh) charges, which are two fundamental components of electricity bills: 

Demand-Based Charges (kW): 

• Demand charges are based on the highest level of power (measured in kilowatts) a customer uses at one point in time. In PJM, capacity costs are tied to a customer’s Peak Load Contribution (PLC), which measures their average demand during the system’s five highest demand hours in the prior summer (June 1 – September 30). 

Energy-Based Charges (kWh): 

• Energy charges, on the other hand, are based on the total amount of electricity a customer consumes over time, measured in kilowatt-hours. These charges cover the cost of producing and delivering the electricity used and are unrelated to the capacity required to meet peak demand. 

The key distinction is that demand charges focus on the rate of energy use at specific moments, while energy charges accumulate based on overall consumption. A common analogy is that energy (kWh) represents the miles you have driven your car and is measured by the odometer, whereas demand (kW) represents the fastest rate you drove your car and is measured by the speedometer.

What is happening on June 1st?

On June 1, 2025, PJM's capacity prices are set to increase significantly, impacting electricity costs for consumers and businesses across its service area. The rise is driven by factors such as significant growth in electricity demand, power plant retirements, delays interconnecting new generation and supply-demand imbalances. 

Another primary driver of the capacity cost increase is that Federal Energy Regulatory Commission (FERC) authorized significant changes to how PJM models the capacity Base Residual Auction (BRA), which comes into effect in June 2025. The main changes are related to:

1. how PJM models the resource adequacy risk
2. how resource accreditation is calculated
3. early re-entry of the Fixed Resource Requirement entities to the BRA

For consumers, this means higher electricity bills, with some estimates suggesting increases of up to 30%.

Be aware that fixed capacity costs could be subject to Change in Law implementation by suppliers, in order to pass through these higher costs from June 2025 onwards – World Kinect continues to monitor this situation on behalf of our clients. 

In addition, given PJM capacity auction delays and the potential for additional market structure reforms, capacity rates are still unknown beyond May 31, 2026. We recommend working closely with your business partner to evaluate the optimal procurement strategy.

Managing cost increases: strategies for companies

As electricity prices fluctuate, businesses can proactively manage cost increases using these strategies:

1. Peak Load Contribution (PLC)management: PJM identifies the five highest demand hours of the year (known as “5CP hours”) to calculate a customer’s PLC for the following year. By reducing demand during these critical peak hours, customers can lower their PLC and reduce their capacity charges.
2. Demand Response programs: These programs allow customers to be compensated for reducing load during peak periods. This generates revenue that can be used to offset the increased costs.
3. Energy Efficiency investments: Implementing energy-efficient technologies can reduce overall demand and peak usage. Examples include upgrading HVAC systems, installing LED lighting, and optimizing industrial processes.
4. Load Shifting: Organizations can shift energy-intensive activities to off-peak hours when grid demand is lower. This might involve running certain operations overnight or staggering production schedules, or simply shifting loads out of the summer afternoon periods when those 5CP hours typically occur.
5. Battery Energy Storage Systems (BESS): On-site battery systems can store energy during low-demand periods and discharge it during peaks, reducing reliance on the grid during critical hours. Battery storage are excellent tools for displacing load during the 5CP hours, thereby reducing capacity charges.
6. On-Site generation: Using on-site renewable energy or backup generators during peak periods can also reduce demand from the grid and, in turn, capacity costs.
7. Real-Time Monitoring and Controls: Advanced energy management systems provide real-time data on energy usage, allowing for precise control and immediate response during peak demand events. 

Capacity costs in PJM are a necessary expense to maintain grid reliability, but they can be a significant component of an organization’s electricity bill. Understanding the PJM capacity rules and the difference between demand-based and energy-based charges is crucial for managing these costs effectively. 

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