Skyrocketing Cost of Capacity Increasing PJM’s Cost of Electricity
Energy News: September 5, 2024 Skyrocketing Cost of Capacity Increasing PJM’s Cost of Electricity * Capacity is the amount of
Energy News: September 5, 2024 Skyrocketing Cost of Capacity Increasing PJM’s Cost of Electricity * Capacity is the amount of
Energy News: September 5, 2024
On July 30th, the PJM announced the results of their 2025/2026 Base Residual Auction, which you can access in the following link. The report revealed that the cost of Capacity will increase in most zones from $28.92 to $269.92 $/MW-Day, which will increase the cost of Electricity by more than 2 cents per kWh starting in June 2025.
The significantly higher prices were caused by supply/demand imbalances across the PJM, which they warned was forthcoming in their Feb 24, 2023 report.
The PJM warned in this report:
“The amount of generation retirements appears to be more certain than the timely arrival of replacement generation resources and demand response, given that the quantity of retirements is codified in various policy objectives, while the impacts to the pace of new entry of the Inflation Reduction Act, post-pandemic supply chain issues, and other externalities are still not fully understood.”
The PJM’s 2025/2026 Base Residual Auction confirmed retirements are adversely impacting the amount of Capacity available in their auctions going from 183,550 in 2021/22 to 135,692 MW in 2025/26.
Since 2021/22 the amount of Capacity available in the PJM auctions decreased by 26%, while electricity demand continues to increase due to the proliferation of high-demand data centers needed to power the growth in AI. The expansion of highly concentrated clusters of data centers in some zones is exhibiting significantly more demand growth – as high as 7% annually.
The supply/demand imbalances PJM warned were forthcoming in their Feb 24, 2023 report will adversely impact your cost of Electricity starting in June 2025, and as a consumer, there is little you can do about the increase in Capacity embedded in your cost of Electricity.
But as a consumer of Electricity in a deregulated state, you can mitigate the effects of the increases by reserving Electricity while Natural Gas, which is the largest source of power for the generation of Electricity is near its lowest price since 2000:
We recommend securing long-term agreements when your agreements expire. Although Capacity is the 2nd largest component of the cost of Electricity, the largest component is based on the cost of generation; therefore, you can keep your cost of Electricity as low as possible by reserving long-term agreements while this component is near its lowest price since 2000.
Not every client’s risk tolerance and hedging strategy are the same, but hopefully, today’s report will help put your risk/reward opportunities into perspective. We invite you to call one of our energy analysts to help you plan a hedging strategy appropriate for your situation.
Ray Franklin
Energy Professionals
Senior Commodity Analyst
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