Capacity Market Design Dysfunction and Price Volatility

Definition

PJM Interconnection, the largest U.S. ISO, is trying to overhaul its capacity market amid warnings that it may soon face major supply shortfalls. Record-high capacity auction prices in July 2025 sparked unprecedented turmoil, with capacity auction delays and a condensed auction schedule creating planning uncertainty for utilities and generators. Capacity market reforms undertaken by PJM over several years have failed to send appropriate investment signals, resulting in both oversupply in some periods and shortage risks in others. CFOs cannot accurately forecast capacity costs (they represent 30-50% of wholesale electricity costs), making long-term budgeting nearly impossible. Operations directors face uncertainty in whether planned generation will earn sufficient returns through capacity markets, delaying investment decisions. MISO and other grid operators are also proposing major market changes, creating regional inconsistencies that complicate multi-regional operations for large utilities.

Why This Matters

Capacity market hedging platforms, wholesale electricity price forecasting SaaS, ISO compliance and tariff change management software, energy market policy advisory consulting

Affected Stakeholders

Chief Financial Officer / Finance Manager, General Manager / Operations Director

Related Business Risks