While this new structure is intended to prevent extreme price swings, it also locks in elevated costs through at least 2028. Businesses must now adjust their energy strategies to manage higher electricity prices and avoid unexpected budget shortfalls.
Here’s what you need to know about the capacity market changes, the impact on your business, and how Comfort Profit Consulting can help you prepare.
The 2025/2026 Capacity Price Spike: A Historic Increase
The results of PJM’s most recent Base Residual Auction (BRA) were startling. For the 2025/2026 delivery year:
- In PJM’s RTO region, capacity prices surged from $28.92/MW-day to $269.92/MW-day, an 833% increase.
- In constrained areas like PSEG, prices jumped from $54.95/MW-day to the same $269.92/MW-day, representing a 391% increase.
- Similar increases were seen in other zones, like BGE, where prices rose by over 500%.
This sharp escalation was driven by a perfect storm: aging infrastructure, slower development of new generation capacity, growing demand from sectors like data centers, and regulatory changes intended to bolster grid reliability.
For commercial energy users, these capacity charges—which are embedded in most electricity supply rates—could lead to six- or seven-figure increases in annual utility costs.
What Is PJM’s New Cap and Collar?
In response to outcry from ratepayers and policymakers—particularly the state of Pennsylvania—PJM proposed a new framework to limit future volatility: a “cap and collar” mechanism for capacity prices.
The Federal Energy Regulatory Commission (FERC) approved the proposal in April 2025. Here are the details:
- Price Cap: $325 per megawatt-day
- Price Floor (Collar): $175 per megawatt-day
- Applies To: 2026/27 and 2027/28 Base Residual Auctions
- Uniform Application: The cap and collar will apply across all Locational Deliverability Areas (LDAs), regardless of congestion or reliability constraints.
In effect, the cap and collar create a hard boundary around where auction clearing prices can land over the next two years. This provides more budget certainty for energy buyers—but also locks in a new “normal” for higher costs.
Why Was This Structure Introduced?
Several factors motivated PJM and stakeholders to push for this reform:
- Reliability Assurance: PJM needed to ensure enough generation remains available to meet rising demand.
- Economic Protection: Pennsylvania’s Governor’s Office advocated for more predictable pricing to shield businesses and consumers from unsustainable spikes.
- Market Confidence: Stabilized pricing bands help developers and generators plan future investments more effectively.
While the cap and collar prevent worst-case price surges, the reality is that capacity prices will remain far higher than they have been historically.
How Capacity Costs Impact Your Business
In PJM, capacity costs are passed on to commercial customers as part of their total electricity supply rate. These charges are based on your business’s Peak Load Contribution (PLC)—a measurement of your usage during PJM’s five highest system peak hours.
For example:
- If a business has a PLC of 1 MW and the capacity price is $269.92/MW-day, its annual capacity cost is around $98,520.
- If the business uses 5,000,000 kilowatt-hours annually, this equates to about $0.0197 per kWh purely in capacity charges.
When you consider that energy supply contracts often fix commodity prices but leave capacity as a variable pass-through cost, failing to manage or mitigate these charges can create significant unplanned expenses.
What Commercial and Industrial Customers Should Do Next
The new cap and collar structure gives businesses some visibility into future risks—but those risks are substantial. To navigate the next three years successfully, Comfort Profit Consulting recommends:
- Contract Audits: Review existing electricity supply contracts to understand how capacity costs are treated (fixed vs. pass-through).
- PLC Management: Implement strategies to monitor and reduce your Peak Load Contribution, including peak shaving during grid stress events.
- Strategic Procurement: Evaluate your energy procurement strategy to ensure it aligns with new market strucutres.
Contact us today for a free capacity rate evaluation to see how you can curtail energy costs.
