Near-term relief, long-term discomfort reveal limit to PJM capacity market fixes

PJM Interconnection LLC's load outlook has shifted dramatically, moving from nearly a decade of annual growth of less than 1% to forecasts since 2022 that have projected significant increases in energy and peak demand. This change explains the sharp rise in capacity costs that PJM has worked toward mitigating through market modifications. When applying the new variable resource requirement (VRR) demand curve, capacity prices are expected to decrease modestly by $5 per megawatt per day in 2028 and then by $40/MW-day by 2040 versus the baseline VRR curve from the December quarter of 2025. Layering on the PJM forecast near-term adjustments in load is projected to reduce prices an additional $33/MW-day by 2028, a total reduction of $38/MW-day. By 2040, an anticipated 8% increase in load could flip the result and elevate capacity prices by $104/MW-day relative to the baseline.

Additionally, PJM's supply stack is becoming less firm as dispatchable retirements outpace dependable replacements, creating a widening "transition gap" between forecast load growth and firm additions, resulting in a projected shortfall of 15 GW by 2030. This situation heightens the risk of tighter reliability conditions and continued upward pressure on capacity prices, even as PJM's market redesign attempts to moderate near-term outcomes.

➤ PJM's 10-year generation growth rises sharply, projecting over 294 terawatt-hour generation growth annually from 2022, with the growth in annual energy generation outpacing that of peak load due to round-the-clock power demand of data centers.

➤ By some estimates, rapid data center expansion was responsible for $9.33 billion in consumer costs in the 2025–26 PJM capacity auction, leading state- and federal-level politicians to push back on behalf of their constituents.

➤ Recent updates to the VRR curve reduce capacity prices by $5/MW-day in 2028 and $40/MW-day by 2040 relative to the baseline VRR curve used in the 2027–28 PJM capacity auction. Forecast declines are amplified early with the reduced PJM projected load growth, but are soon reversed in the long term as PJM load growth projections accelerate.

➤ PJM faces a "transition gap" with supply not meeting expected demand growth, despite planned capacity additions, as these projects equate to only about 14 gigawatts of additions, falling short of the projected peak demand growth of nearly 29 GW by 2030.

PJM's latest load forecasts show a fundamental shift in demand growth that is reshaping expectations across the capacity market. For nearly a decade, PJM's 10‑year outlook pointed to limited expansion, with generation growth generally remaining below 60 TWh and both peak and energy growth rates tracking under 1% over the 10-year forecast period. The forecasts published since 2022 mark a clear turning point. Projected 10‑year generation growth rises sharply, averaging more than 294 TWh from 2022 onward and climbing to nearly 582 TWh in the 2026 forecast. Moreover, peak and energy compound annual growth rates (CAGRs) move upward in lockstep, reaching their highest levels in the series and signaling that PJM expects not only faster growth but growth that persists throughout the full forecast horizon.

The magnitude and persistence of these increases align closely with the rapid expansion of data centers across the region, as highlighted by the growth in annual energy generation outpacing that of peak load. Rapid data center growth is reshaping PJM's load shape and creating continuous, high‑intensity demand profiles that, by some estimates, increased costs to consumers by $9.33 billion in the 2025–2026 capacity auction, which occurred in July 2024. These facilities add significant energy consumption throughout the day and substantially elevate requirements during peak conditions.

Even with PJM's 2026 load forecast update projecting some softening in the most immediate years, the overall structural trend remains strong, and PJM's longer‑term expectations continue to be revised higher rather than stabilize. Consequently, the system is heading into a period characterized by more frequent and more severe tight conditions, expanding the number of critical hours that must be covered by firm capacity, rather than relying on isolated summer peaks as a means of ensuring reliability.

PJM's evolving resource mix is increasingly shaped by intermittent renewable generation, which is less dependable during hours when reliability risk is highest, as reflected in PJM's effective load carrying capability (ELCC) class ratings. Reaction to the December 2022 winter storm — where 6 GW of mostly natural gas-fired generation was unavailable when called — modified the natural gas class ratings, decreasing their ELCC by an average of 24.5 percentage points.

Despite this downgrade, the system will become more reliant on dispatchable or firm generation, and flexible demand‑side options that can contribute most of their capacity and perform consistently during peak conditions. These dynamics, combined with significant load growth, have contributed to markedly higher capacity prices in the last three auctions and reinforced a tighter reliability outlook.

With prices negatively impacting residential consumers of power — some seeing a double-digit percentage energy bill increase — some states have considered leaving the power market and others have enacted executive orders to fund energy bill credits for residential customers. Partially in response to this feedback from stakeholders, PJM redesigned its VRR curve formulation.

The potential impact of these changes on the demand curve and resulting prices is examined by updating the Market Indicative Power Forecast capacity price model to the new VRR formulation and comparing the output to the 2025 Q4 Market Indicative Power Forecast PJM capacity prices posted on Capital IQ Pro.

The updated VRR formulation flattens and widens the 2027 demand curve, as shown by the "New VRR curve", decreasing prices when reliability requirements are not met, and increasing prices more rapidly when they are met or exceeded. The reliability requirement is directly related to the PJM load forecast that was updated with a reduction in the near-term load, as only "firm" construction commitments or electric service obligations were considered, and longer-term projects were derated to account for their uncertainty. Applying this reduced near-term reliability requirement, in addition to the new VRR formulation, shifts the curve to the left in the near term. In future years, the demand curve is forecast to shift to the right as the 2026 PJM load forecast is higher than the 2025 forecast.

When applied to the same supply stack used to produce the Q4 2025 Market Indicative Power Forecast PJM capacity price forecast, the new VRR curve results in reduced capacity prices relative to the Q4 2025 prices. Prices reduce by $5/MW-day in 2028 and by $40/MW-day in 2040, as the shallower slope reduces the prices. Layering on the changes in the PJM load forecast further reduces the capacity prices in the near term to $38/MW-day with a 3% decrease in the load, but then rapidly erodes any gains from the new VRR curve with an 8% increase in the 2040 load that increases capacity prices by $104/MW-day.

On Feb. 12, 2026, the PJM board decided to continue the price collar for the 2028–2029 and 2029–2030 auctions and will submit a filing to Federal Energy Regulatory Commission in time for the 2028–2029 auction. The extension has the potential to reduce the 2028–2029 capacity price by $100/MW-day, outpacing combined benefits of the new VRR curve and reduced near-term PJM load.

Politicians at the state and federal level have also stepped into the fray to shore up reliability, and in the hopes of shielding ratepayers from further price increases. Most notable is the statement of principles from all state governors in the PJM footprint, plus the White House advocating for multiple changes that include PJM holding a backstop auction to procure generation explicitly for data centers.

With future supply uncertainty and the Trump administration supporting the coal industry, coal-fired power plant retirements are being delayed by the Department of Energy (DOE) and, more recently, their energy revenue prospects were bolstered with the executive order to enter into power purchase agreements with coal-fired power plants that will support reliability. Two of the seven fossil fuel-based power plants affected are in PJM, Eddystone 3-4 in the Commonwealth of Pennsylvania and Herbert A Wagner unit 4 in State of Maryland. These contribute a total of 893 MW of nameplate capacity that reduces to 72 MW of available capacity to meet demand when accounting for each plant's capacity factor. Keeping coal-fired power plants online past their retirement date supports reliability but at a high cost that is not accounted for in the DOE mandates and could cost US ratepayers at least $3.1 billion annually by the end of 2028.

Even with three auctions clearing with high capacity prices, it is still unclear whether the supply needed to meet demand will materialize, as these auctions occurred in quick succession between July 2024 and December 2025 while data center load growth continued unabated, and federal policy made the "quick to build" and cheap renewable resources less economic.

Over the past several years, the dispatchable resources in the PJM footprint have increasingly been replaced by non-firm renewable generation. Since 2020, more than 20 GW of operating capacity has retired across the region, primarily from coal and natural gas units. Using PJM's 2027–28 ELCC class ratings, these retirements represent about 16 GW of firm capacity removed from the system. Over the same period, approximately 27 GW of new generation has entered service — including about 14 GW of solar — but these additions translate to only about 9 GW of firm capacity, underscoring the growing gap between nameplate additions and dependable supply.

Looking ahead, S&P Global Market Intelligence is tracking about 41 GW of planned additions across PJM that are either actively under construction or under development, with expected online dates by 2030. On a firm capacity basis, however, these projects equate to only about 14 GW of additions. This falls short of PJM's latest load forecast, which projects peak demand growth of nearly 29 GW by 2030, driven largely by data center expansion and broader electrification trends.

The widening gap between expected demand growth and firm supply additions is increasingly being characterized as a "transition gap", where market signals and recent policy reforms have yet to translate into sufficient new build activity. PJM itself has acknowledged these development challenges in its latest 2027–28 BRA Reserve Target Shortfall report, citing ongoing constraints including supply chain bottlenecks, local permitting hurdles, lengthy interconnection timelines and persistent regulatory and administrative uncertainties that continue to delay project advancement.

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For wholesale prices and supply and demand projections, see the S&P Global Market Indicative Power Forecast.