The largest power grid in the country is having an historical moment. PJM—the grid that spans 13 states and serves 67 million—may conduct a first-ever “emergency” auction to secure power generation capacity amid the coming deluge of demand from data centers. This rising demand, along with other factors, has led to record-high settlement prices in recent capacity market auctions and a significant shortfall in the capacity needed to ensure system reliability. This article explores why electricity prices are rising and analyzes the drivers of the recent capacity shortfall. The author, Chris Holt, also identifies necessary changes to market design rules and explains why the application of sound economics will be critical in securing reforms that can benefit all stakeholders, including market participants, regulators, and the system operator.

A Call to Auction

In January, two White House officials and 13 governors representing the states that make up the PJM electricity grid jointly expressed their determination to pursue an “emergency” power generation capacity auction.¹ The purpose of this auction, and other related objectives outlined in a written “statement of principles,” is to ensure system reliability in anticipation of surging electricity demand from data centers within the PJM system. Almost simultaneously, PJM’s Board of Managers released its own letter that also outlines a path for accommodating the additions of large electricity loads. While the two documents differ on specifics, they are fundamentally aligned on key ideas, including the hastened execution of a mechanism known as the “Reliability Backstop Auction” and a holistic review of PJM’s market design for power generation resource adequacy. These ideas reflect growing concern over record-high prices in recent capacity market auctions and rising electricity costs throughout PJM states.

CAPACITY PRICE TRENDS IN CONTEXT

The high clearing prices in PJM’s last three capacity market auctions have raised alarm bells, leading to a lawsuit from the Pennsylvania governor’s office (now settled through the establishment of a price collar) and persistent calls for market reform.² But the most recent numbers, a settlement price of $333 per megawatt per day (MW-Day) resulting in $16 billion in expected capacity costs, do not lend themselves to straightforward interpretation—electricity markets are notoriously complicated, and capacity payments are only one of several components of overall wholesale electricity costs.

To provide broader context, Figure 1 illustrates historical wholesale electricity costs broken into their component parts: energy, capacity, transmission, ancillary services (services like frequency regulation that keep the grid running smoothly), and administrative fees. The capacity market costs (in red) shown for 2026 and 2027 reflect the settlement outcomes (total costs) divided by forecast megawatt hours (MWh). The large uptick in capacity market clearing prices that occurred between 2024 and 2026 translates to an increase in wholesale costs of $15 per MWh; the capacity component alone therefore represents a 26% increase over 2024 total wholesale costs. Energy prices, which make up the largest portion of the wholesale price, exhibit volatility due to fluctuations in the natural gas price. However, energy prices are also typically higher when capacity is constrained, as supply constraints require more frequent dispatch of relatively expensive generation units. Tighter system capacity can therefore indicate the potential for higher energy prices. Overall, wholesale costs were 29% greater in 2025 relative to the previous five-year average.

MOVING FAST AND BREAKING STUFF

The current situation is attributable to a fundamental mismatch of supply and demand created by conflicting timelines. As described in recent analysis by NERA experts, a near-term, massive surge in demand from data centers is at odds with the much slower-moving nature of the infrastructure investments and regulatory processes required to expand supply.

On the demand side, projections are simply staggering: The latest long-term forecasts from PJM indicate summer peak load is expected to be approximately 34,600 MW greater in 2031 relative to 2026—a system-wide increase of 22%, comparable in magnitude to adding the summer peak consumption of three New York City-sized cities in five years’ time.³ These heightened demand forecasts translate to large increases in the reliability targets of the capacity market auction. The most recent reliability target included 4,000 MW of demand from existing data centers and an additional 13,000 MW from data centers in the pipeline.⁴ Significant uncertainty adds further complication; for example, PJM’s most recent forecast for 2028 reflects a downward adjustment of 4,400 MW (2.6%) from last year’s estimate.⁵

On the supply side, observers have identified a confluence of factors that inhibit a smooth expansion of capacity. Most cited among these factors are an interconnection backlog, supply chain holdups, and retirements of legacy power plants.⁶ Other market design choices, such as proper capacity market accreditation and seasonal resource matching requirements, also play a critical role in determining how efficiently supply enters the market.

In the most recent capacity market auction, the mismatch of supply and demand resulted in a shortfall of approximately 6,600 MW—roughly the amount of generation capacity required to power New York City during an average day.⁷ This is also approximately the amount that PJM increased its reliability target relative to the previous auction (which occurred only five months prior) to accommodate data center demand.⁸ PJM has noted that, absent the price collar (imposed prior to the 2026/2027 capacity market auction, held in July 2025), only an additional 800 MW would have been secured and at the significantly higher price of $529.80 per MW-Day.⁹ This finding implies that at no price could the market have provided the capacity required to achieve PJM’s target reserve margin of 20%.

Looking Forward

The Reliability Backstop Auction mechanism invoked by the governors’ statement of principles and the Board’s letter is established in the PJM tariff, but the directives call for its implementation on an expedited timeline. In particular, current rules stipulate the auction shall not be conducted unless a significant shortfall (of at least one percentage point lower than the target reserve margin) occurs in three consecutive capacity market auctions.¹⁰ Only one such event has occurred thus far—despite record-setting prices in the 2026/2027 delivery year auction (two auctions ago), the reserve margin was only missed by 0.2 percentage points.¹¹ The governors’ proposal calls for the Reliability Backstop Auction to be held no later than September 2026, and the Board proposes an “immediate” initiation.¹² Further details on its implementation, such as how demand from data center customers will be incorporated, remain to be determined.

The mere act of conducting an auction will not create the needed 6,600 MW capacity out of thin air. Rather, the system operator and state and federal regulators must pursue actions that facilitate timely provision and accessibility of new supply to the market. Fortunately, there are other, economically sensible market design changes that market participants can encourage through the stakeholder process to make additional supply available in a cost-effective manner. For consumers and suppliers of electricity alike, the stakes involved with implementing these changes properly are high; incorporating sound economic fundamentals into any future market design changes is critical to ensuring that the market functions efficiently and unnecessary costs are avoided.

Three examples of necessary reforms are:

• Expedient Interconnection: The governors’ statement of principles calls for acceleration of interconnection studies; the Board letter proposes a voluntary “bring your own new generation” approach and implementation of an “expedited interconnection track” for state-backed generation with a contractual commitment.¹³ These directives come alongside other initiatives to improve interconnection times, including fast-tracking the transfer of interconnection from retiring plants to replacement generation resources.¹⁴ NERA’s experts can provide guidance on navigating this rapidly evolving interconnection landscape, helping clients manage regulatory uncertainty and quantify the risks and benefits of different interconnection options.
• Sensible Cost Allocation: The governors’ statement calls for the allocation of costs of new capacity procured through the auction to load serving entities (LSEs) with new data centers and remaining costs allocated according to their “net short” positions—the difference between an LSE’s capacity obligation and the amount of capacity it has secured.¹⁵ The Board letter also calls for PJM to consider mechanisms that assign costs to LSEs that are short of capacity due to load growth and for those LSEs to “in turn, determine how such costs are allocated to incremental loads, consistent with state law.”¹⁶

Cost allocation may require practical considerations on a state-by-state basis. For example, in some restructured states, wholesale suppliers compete through separate auction processes to provide default service (which generally includes energy, capacity, and ancillary services) to electric utilities and to assume the role of LSE.¹⁷ NERA has long-standing experience designing and managing these default service auctions throughout the PJM region and understands that each state regulatory environment is different such that there is no one-size-fits-all auction design. Coordination between these states and PJM can ensure electric utilities are able to allocate these costs to the intended customers in a direct and efficient manner.    

• Wholesale Reform of the Wholesale Market Design: Both sets of proposals essentially call for structural wholesale market design reform in the near future, including, for example, a reconsideration of the timeline of the capacity market and potential departure from the current approach of a one-year capacity commitment three years out. Such reforms raise complex questions around incentives, investment, and reliability that are best addressed using rigorous economic analysis.

The upcoming process of implementing these proposals presents a range of opportunities to adjust rules to improve market efficiency and allow price signals to function as intended. If these rules are improved with sound economics in mind, all participants benefit.

Notes

1 See “Trump Administration Calls for Emergency Power Auction to Build Big Power Plants Again,” US Department of Energy, 16 Jan 2026, available at https://www.energy.gov/articles/trump-administration-calls-emergency-powerauction-build-big-power-plants-again.

2 See Order Accepting Tariff Revisions and Dismissing Complaint re Commonwealth of Pennsylvania v. PJM Interconnection, L.L.C. under ER25-1357 et al., available at https://elibrary.ferc.gov/eLibrary/filelist?accession_num=20250421-3069.

3 See “2026 PJM Load Forecast Report” Tables, 14 January 2026, available at https://www.pjm.com/-/media/DotCom/planning/res-adeq/loadforecast/2026-load-report-tables.xlsx (showing forecasts of 156,373 MW and 191,017 MW for 2026 and 2031, respectively). Summer peak consumption in New York City is approximately 10,000 MW. See NYISO 2025 Gold Book Baseline Forecast Tables, available at https://www.nyiso.com/documents/20142/51231901/2025-Gold-Book-Baseline-Forecast-Tables.xlsx, Table 1-3a (Zone J).

4 See “Monitoring Analytics,” Analysis of the 2027/2028 RPM Base Residual Auction, Part A, 5 January 2026, at 2.5 “2026 PJM Load Report,” available at https://www.pjm.com/-/media/DotCom/library/reports-notices/load-forecast/2026-load-report.pdf, at 5.6 See, e.g., Howland, Ethan, “PJM Capacity Prices Hit Record High as Grid Operator Falls Short of Reliability Target,” Utility Dive, 18 Dec 2025, available at https://www.utilitydive.com/news/pjm-interconnectioncapacity-auction-data-center/808264/.

7 See NYISO 2025 Gold Book Baseline Forecast Tables, available at https://www.nyiso.com/documents/20142/51231901/2025-Gold-Book-Baseline-Forecast-Tables.xlsx, Table 1-3a (Zone J) (showing 49,703 GWh consumption in 2024, or 5,674MWh hourly average).

8 PJM 2027-2028 BRA planning period parameters, Table 1, showing an increase in the reliability requirement of 6,295 MW unforced capacity.

9 PJM 2027/2028 BRA Report, at 16.

10 See PJM Open Access Transmission Tariff, p. 5,722.

11 See PJM 2027/2028 BRA Report, at 5; PJM 2026/2027 BRA Report, at 4.

12 Statement of Principles, at 1; PJM Board Letter, at 5.

13 PJM Board Letter, at 3–4.

14 See Order Accepting Tariff Revisions re PJM Interconnection, L.L.C. under ER26-403-001, available at https://elibrary.ferc.gov/eLibrary/filelist?accession_num=20260129-3068.

15 Statement of Principles, at 1.

16 Board Letter, at 6.

17 Pennsylvania Code, available at https://www.pacodeandbulletin.gov/Display/pacode?file=/secure/pacode/data/052/chapter54/s54.186.html&d=reduce.