We’ve recently seen some questions regarding the wholesale energy market, forecasting, and how we – and other providers – price electricity. Here are a few things to help you understand the process and provide market context.
What is Capacity Generation?
Capacity generation refers to the maximum amount of electricity that a power plant or system can produce at a given time. This is critical to retail energy providers like us, as it ensures that there is enough power available to meet demand, even during peak times when electricity usage is highest. This capacity is secured through auctions, where power generators bid to provide this generation capability in future periods, usually years in advance. The recent PJM auction resulted in a price increase of nearly 800% and will impact prices in 2025 and 2025. (More on that below.)
What are Capacity Tags?
Capacity tags are markers that indicate the share of capacity that a particular customer or load is responsible for. These are defined by peak usage, or the total kilowatt hours used during hours or days with the highest demand.
In deregulated markets, like the ones we serve, these tags are used to allocate costs associated with maintaining the grid’s reliability, meaning that those with higher capacity tags (higher usage during peak times) will incur higher costs.
Each year, utilities and distribution companies calculate and report their peak load contribution to their grid operator, and the utility will use that information to determine individual peak load capacity.
How Do These Impact Pricing?
The costs associated with maintaining sufficient capacity to meet demand (especially during peak periods) are passed on to consumers. These costs are reflected in their electricity bills as capacity charges, which can fluctuate based on market conditions. Higher capacity tags mean higher capacity charges for customers, causing energy costs to fluctuate and more expensive during periods of high demand.
What is Going on with PJM and Their Prices for 2025 and 2026?
PJM, a regional transmission organization that coordinates the movement of electricity in parts of 13 states and DC, recently held a capacity auction for the 2025-2026 delivery year. The auction resulted in significantly higher prices -- jumping from $28.92/MW-day to $269.92/MW-day.
These higher capacity prices signal a tightening of the supply-demand balance in the region, driven by factors like the retirement of older generators and a slower-than-needed pace of new generation coming online. For customers and salespeople, this means anticipating higher energy costs in the future and understanding how these market dynamics could affect pricing and strategies for managing electricity costs.
What does this mean for us?
Customers enrolled on 36-month rates prior to August 1, 2024, are protected from the increase in PJM capacity rates, highlighting the value of long-term price protection. Think Energy 36-month rates available for new customers increased on August 1, 2024.
Utility rates will incorporate the increased capacity prices from June 1, 2025, to May 31, 2026. Think Energy 12-month rates will begin increasing in line with these capacity prices, as the term of the contract overlaps increasingly with the 2025/26 PJM planning year.
To optimize value for PJM customers new and renewals:
- Immediate Term (6-9 months) - short-term products that are not impacted by the 2025/26 capacity results.
- Medium Term (9+ months) - long-term products which average the 2025/26 capacity rates.
In taking a look at the bigger picture, these changes further underscore the importance of our burgeoning community solar business. By sharing community solar with more customers, we’re able to provide them with relief from surging prices while also easing the load on the stressed grid in the form of sustainable, solar power.
What does this mean for our customers? What should we advise?
This one goes out to all of our Think Energy and Think Community Solar customers (and prospective customers) across these PJM markets: Delaware, Illinois, Maryland, New Jersey, Ohio, Pennsylvania, and Virginia.
The PJM auction may have been for the 2025/2026 capacity year, but prices are already beginning to increase as providers make reactionary decisions in order to protect their costs. Think Energy has proactively adjusted its longer-term rates to account for expected market changes and, while other providers might have trouble fulfilling contracts due to market volatility, opting for a longer-term plan with Think Energy allows customers to lock in favorable rates now and avoid the financial impact of these market fluctuations, ensuring more predictable and stable energy costs over time.
