Dive Brief:

• The PJM Interconnection on Wednesday proposed three broad frameworks for reforming its markets to help ensure its 13-state region has adequate power supplies to meet growing demand.
• The options are: stabilizing PJM’s existing capacity market; rationing grid reliability among customer classes or regions; and shifting to a market focused on energy and ancillary services and away from the capacity market, PJM said in a white paper, Powering Reliability Through Market Design.
• PJM will lead stakeholder discussions on the options through 2026, with the goal of developing enough of a regional consensus to move forward with market design changes, according to the white paper. “The current situation is not tenable,” PJM President and CEO David Mills said in the report. “The region has years, not decades, to make these choices deliberately.”

Dive Insight:

For years, PJM operated with more than enough power supplies to meet its needs and handle a shift away from coal-fired power plants to gas-fired generation. However, two years ago, capacity prices soared, largely driven by plans to add data centers in PJM’s footprint.

In January, the PJM board issued directives to the grid operator’s staff on how to respond to the changing circumstances. One of the directives called for a reassessment of PJM’s capacity market, which is designed to ensure the grid operator has enough power supplies three years in the future.

Currently, PJM’s capacity market faces a “credibility trap,” with the high capacity prices that incentivize new construction being undermined by government intervention aimed at lowering the prices, according to the white paper. The Federal Energy Regulatory Commission, for example, on April 28 approved an extension of a price cap and floor for two upcoming capacity auctions.

“When prices spike and unhedged load is immediately exposed, policymakers face intense pressure to intervene through price caps, emergency backstop procurements, or other administrative actions that signal to investors that the revenue they are counting on to recover their costs may not materialize,” PJM said.

In its white paper, PJM said its three proposed frameworks each have pros and cons, and aren’t mutually exclusive. The grid operator said it expects stakeholders will develop additional options.

Under Path A, the market-stabilization framework, PJM would keep its capacity market, but the vast majority of load would have to be covered through long-term capacity commitments. Capacity would clear at high prices when the system is short — maintaining an investment signal — but most load would be insulated from the high prices through forward contracts, PJM said.

The “differential reliability” path, called Path B, would create a formal plan for determining which customers could see power outages when there isn’t enough electricity to meet demand, according to the white paper.

“Path B assumes that the investment needed to return the PJM system to its desired reliability level will either not happen in a timely manner and therefore it becomes a bridge solution, or, not happen at all,” the grid operator said.

PJM is working with stakeholders on one element of the rationing approach by developing a “connect and manage” process for large loads that don’t have their own new power supplies, PJM noted.

Path C calls for making the energy and ancillary services market the central pathway for ensuring reliability, with the capacity market becoming a backstop mechanism for capacity owners to recover any revenue shortfalls.

“A well-functioning energy market can provide the revenue recovery that generators need to justify investment, making the capacity market largely redundant,” PJM said.

Shifting away from the capacity market has major advantages, but would be a multi-year process, according to PJM. The paper also said PJM could implement some combination of the proposed reforms.

“PJM may be operating on multiple tracks simultaneously: implementing Path A hedging reforms in the near term (2026–2029), piloting Path B differentiation frameworks for large new load (2027– 2030), and developing the E&AS market reforms that would make a longer-run Path C transition feasible (2028 and beyond),” the grid operator said.

Following the paper’s release, analysts with Jefferies said they expect reforms will be in place before PJM holds a capacity auction that is scheduled for May 2027.

“We are expecting reform that would ultimately result in lower capacity prices for the existing [generating] assets, while providing more longer term price signal/compensation structure for the new generation and maintaining system reliability,” they wrote in a note Wednesday.