FAQs

Capacity Cost Increase

• What are capacity costs?

  Capacity costs are charged by Regional Transmission Operators (RTOs), such as PJM, to ensure sufficient generating capacity for system reliability during peak hours of electrical consumption. These rates can differ from one utility to the next and can represent up to 40% of your total energy spend, depending on your load factor.

• How are my business’ capacity costs calculated?

  Your capacity rates are set and fixed annually by RTOs, such as PJM, and are based on your organization’s Peak Load Contribution (PLC), which is set annually and is based on your energy usage during PJM system peak hours. In many utilities within PJM, the PLC is calculated by taking your average demand level during the five highest demand hours for the entire PJM system.

• Who is PJM?

  PJM Interconnection is a regional transmission organization (RTO) that maintains reliability and manages the electricity grid and wholesale electricity market for parts of 13 states and Washington, D.C., serving over 65 million people.

• What is PJM’s capacity price for the 2025/2026 delivery period?

  PJM’s capacity charges are determined through an annual auction process to secure capacity three years in advance. The capacity auction for the 2025/2026 delivery period resulted in a record high price of $269.62/MW-day, up from $28.92/MW-day in the previous auction.  This is an 833% increase.

• When are PJM’s capacity costs expected to increase?

  They are expected to go in effect for customers on the June 2025 meter reading cycle.

• How does PJM determine capacity costs?

  PJM’s capacity costs are determined through an auction process called the Base Residual Auction. Prices may vary between different geographic zones due to transmission constraints. Here’s how the auction process works:

  • PJM reviews available power generation resources to assess their capacity to meet peak demand.
  • Power generators submit bids with the price they would charge to supply electricity.
  • PJM sets a clearing price based on these bids, ensuring enough capacity is secured.
  • The auction price directly impacts the energy rates paid by consumers.
• When does PJM have capacity auctions?

  PJM capacity auctions are usually held three years in advance of the delivery year. However, that has not always been the case in the last several years, where they have been delayed or shortened. The 2025/2026 capacity auction that was originally scheduled in May of 2022 was suspended while FERC considered approval of new capacity market rules. The auction occurred on July 30, 2024. The 2026/2027 capacity auction is currently scheduled to begin July 9, 2024.

• Why does PJM have capacity auctions?

  PJM’s capacity auctions are designed to assure grid stability and future availability of energy resources by encouraging investment in generation infrastructure. In addition, the auctions help determine the market price for capacity, promoting competition among generators and potentially lowering costs for consumer.

• Why are capacity costs rising?

  This year’s auction saw significantly higher prices across the PJM region, driven by a tighter supply/demand balance due to generator retirements, increased electricity demand, and market reforms approved by the Federal Energy Regulatory Commission (FERC). Here are the details:

  1. Decreased Supply: The auction saw a reduction in supply offers, primarily due to generator retirements. Approximately 6,600 MW of generation have retired or signaled intent to retire compared to the previous auction.
  2. Increased Demand: The peak load forecast for the 2025/2026 Delivery Year increased to 153,883 MW, up from 150,640 MW for the 2024/2025 auction.
  3. Market Reforms: FERC-approved market reforms have improved reliability risk modeling for extreme weather and more accurately valued each resource’s contribution to reliability, further tightening the supply/demand balance.
• How can I reduce my capacity costs?

  You can lower your capacity costs for next year by reducing your usage during high peak times in 2025, which happens only a few hours a year. You can take control of your demand costs with AEP Energy’s complimentary PeakAdvisory® program where you’ll receive notifications during high-demand days alerting you to reduce your energy usage.  Learn more about our demand management programs.