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Quandel Energy Solutions Breaks Down the PJM Capacity Market Analysis

Mar 19, 2025 | Quandel Construction, Quandel Energy Solutions

Background

The Pennsylvania New Jersey Maryland Interconnection (PJM) is our regional transmission organization (RTO). PJM’s sole responsibility is grid reliability. They do not generate or sell power and remain profit-neutral. Their primary role is to match electric supply and demand to ensure grid stability through daily operations and two major market structures:

Energy Markets

  • Independent power providers (IPPs) bid to sell, while utilities and retail suppliers bid to purchase electricity.
  • This market operates in both real-time and day-ahead formats.

Capacity Market – Reliability Pricing Model (RPM)

  • PJM conducts a forward auction with a three-year outlook, known as the Base Residual Auction (BRA), where power providers submit bids for capacity availability rather than fixed electricity supply.
  • The lowest bids are accepted until the demand threshold is met, and the final bid that clears sets the clearing price for all accepted participants.
  • Penalties are enforced on providers that fail to meet availability commitments, ensuring reliability.
  • Incremental Auctions (IAs) adjust commitments based on updated demand forecasts.

Capacity Market Challenges: 2025/2026 Base Residual Auction (BRA)

The July 2024 BRA for the 2025/2026 delivery year saw an extreme increase in the clearing price, rising from $29/MW-day in the previous auction to $270/MW-day—the highest in PJM history. Additionally, the entire PJM footprint failed the Market Structure Test, also known as the “Three-Pivotal Supplier Test,” which assesses market competitiveness. This failure suggests that major suppliers can manipulate market outcomes by withholding capacity to influence pricing. Key factors driving the price surge include:
  • Demand Growth: AI data centers have accelerated demand beyond PJM’s forecasting capabilities, contributing to the fastest year-over-year load growth since 2007. The International Energy Agency (IEA) projects continued strong electricity demand growth of 4% annually through 2025, outpacing GDP growth.
  • Supply Constraints: Supply in the RPM capacity market dropped by 13,252 MW, marking the fourth consecutive BRA with declining capacity offerings. The retirement of power plants is outpacing the new generation of projects. Policy, economic factors, and regulatory hurdles are driving accelerated retirements, while new projects are generally smaller and require more interconnection approvals.

PJM RTO SUMMER PEAK DEMAND FORECAST

Impacts of Rising Capacity Prices

  • Effects on End Users: Electricity prices are expected to increase by an average of 30%, with industrial and large commercial users, such as manufacturing plants and universities, facing the highest cost increases. The new pricing structure takes effect starting June 1, 2025.
  • Future Market Adjustments: PJM has implemented market interventions:
    • The BRA now accepts bids only one year in advance, down from three years.
    • A new price ceiling of $325/MW-day has been set, reduced from $500/MW-day.
    • A price floor of $175/MW-day has been introduced, where previously no floor existed.
    • Incremental Auctions will now occur every six months to better align forecasting with market conditions. PJM is expediting interconnection approvals to accelerate the deployment of new-generation resources.

Conclusion

The 2025/2026 BRA results highlight the strain on PJM’s capacity market due to increasing demand and declining supply. With electricity prices set to rise significantly, industrial and high-demand users must prepare for higher costs. PJM’s adjustments, including auction rule changes and expedited interconnection approvals, aim to stabilize the market, but structural challenges remain. Continued monitoring and policy adjustments will be critical to ensuring long-term reliability and affordability in the PJM market. Click here to view the full 2025/2026 BRA Report.

Want to find out more about mitigating the risks to your business?

Quandel Energy Solutions offers strategic energy solutions to help businesses manage rising electricity costs by implementing energy efficiency upgrades, demand response programs, and peak load management strategies to lower consumption and reduce demand charges. We provide onsite energy generation options, including solar, battery storage, and combined heat and power (CHP) systems, to offset grid dependency. Our team also assists with energy procurement, securing long-term fixed-rate Power Purchase Agreements (PPAs), and optimizing market participation to stabilize costs. Through retro-commissioning, smart energy management systems, and sustainability initiatives, Quandel helps businesses navigate PJM’s capacity market challenges while enhancing energy resilience and cost efficiency. Contact us today to find out more about how we can help your business.
For Media Inquiries

Please Contact:

Rob Strickler
P | 717.657.0909
E | info@quandel.com

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