Prices just spiked in the biggest US power market. Blame the grid backlog.

Electricity prices are set to spike for roughly 65 million Americans — and rules that keep new clean energy from being built are largely to blame.

Last week, PJM, which manages the power grid serving Washington, D.C., and 13 states stretching from the mid-Atlantic coast to the Great Lakes, hosted its annual capacity auction — the mechanism whereby the grid operator secures the electricity it thinks it will need to ensure the grid is reliable in the years to come.

The prices earned by participants in this year’s capacity auction were 10 times higher than in last year’s auction. This jump will lead to higher electricity costs for PJM customers. It will also send a clear signal to the energy industry: Build to meet the need for reliable energy and you’ll be rewarded.

“The significantly higher prices in this auction confirm our concerns that the supply/​demand balance is tightening,” PJM president and CEO Manu Asthana said in a statement accompanying the release of the auction results. ​“The market is sending a price signal that should incent investment in resources.”

But a price signal is hardly enough to get new energy connected to PJM’s grid. Just ask the hundreds of wind, solar, and battery project developers who are trying to build in the region. Hundreds of gigawatts of proposed power capacity are unable to move forward because of PJM’s outmoded rules for plugging into the grid — an amount more than large enough to avoid sky-high auction prices like last week’s.

That gridlock is already threatening to derail the clean-energy goals of states within the grid operator’s footprint. Unless PJM can find ways to relieve the bottleneck, it will continue to impede the grid operator’s efforts to solve its grid reliability problems as well, clean energy groups say.

“Everyone says, ​‘This is how markets are supposed to work. We’re sending a strong price signal for new build,’” said Jon Gordon, a director at clean energy trade group Advanced Energy United. ​“Well, how do you do that when PJM can’t figure out how to get projects interconnected to the grid?”

The opposing view from fossil fuel power plants

Owners of the fossil-fueled power plants that won the majority of bids in the latest auction dispute the idea that the interconnection queue is to blame.

Instead, they say PJM’s main problem is that state-level clean energy mandates and energy-market economics are forcing too many closures — namely of coal plants.

Since 2014, about 34 gigawatts of coal capacity in PJM’s territory have been retired, according to federal data. That pace is only set to accelerate, according to PJM’s independent market monitor, which forecasts that as much as 31 percent of PJM’s current 185 gigawatts of generation will be retired by 2030 — due in more or less equal part to regulatory and financial pressures, depending on how the economics play out between now and then.

But fossil-gas-fired power plants, which produce the most electricity in the region, have also struggled in prior years as prices declined on PJM’s capacity market. Capacity markets are designed to provide the compensation needed to keep grid assets up and running so that they can be relied on to supply power in future years.

From that perspective, the latest auction was a welcome correction to years of prices that have been too low, according to Todd Snitchler, CEO and president of the Electric Power Supply Association. The trade group represents power plant operators across the country, with fossil-gas operators making up the lion’s share of its constituency.

“Reliability watchdogs, regulators, policymakers, and PJM itself have been sounding the alarm that the misalignment of power resource retirements and additions poses a serious reliability risk to the grid,” he said in a statement.

Rising electricity demand fueled by growth in data centers, the domestic manufacturing boom, and the electrification of vehicles and buildings has only worsened the situation, Snitchler said. So have the increasing frequency and intensity of extreme weather events that push the grid to the brink, as well as ​“policy choices,” he said — referencing state clean energy mandates that have accelerated fossil-fueled power plant retirements.

“Competitive electricity markets are the best mechanism to maintain reasonable wholesale power costs while facilitating the entry of new, innovative technologies,” Snitchler said. ​“Adequate compensation, however, is required for the resources that keep the lights on to be available when they are needed.”

PJM’s interconnection and grid expansion woes

But compensation is only half of the equation, said Tom Rutigliano, senior advocate for climate and energy at the Natural Resources Defense Council (NRDC). ​“This is supposed to send the price signal, and at least as a reliability backstop, it will slow down retirement of fossil resources until we can get new stuff online,” he said. ​“But we have to close the loop and get new stuff online in time quickly enough to be responsive to the prices.”

PJM’s backlogged interconnection queue has broken that loop, Rutigliano said. At the end of 2023, 3,300 active projects were in its queue, the largest number of any region, according to data from the U.S. Department of Energy’s Lawrence Berkeley National Laboratory (LBNL). While PJM cleared 18 gigawatts of projects to interconnect in 2023, another 269 gigawatts are still bogged down in its queue.

PJM isn’t the only grid operator facing massive grid backlogs. Nor is its region the only part of the country facing an increasingly dire need for resources that can help the grid weather periods of high electricity demand.

But projects in PJM’s interconnection queue face the longest delays and among the highest grid-upgrade costs of any region, according to LBNL data. The grid operator earned a D- from an Advanced Energy United scoring of interconnection processes.

PJM also has one of the dirtiest grids in the country, a fact highlighted by the distribution of resources that won bids in its capacity auction: 48 percent gas, 21 percent nuclear, and 18 percent coal, compared with 4 percent hydropower, 1 percent wind power, and 1 percent solar.

“I think this interconnection situation is a real crisis, and I don’t think PJM is thinking creatively enough to move things forward,” Gordon said. ​“The hole they’ve dug themselves into will be hard to get out of.”

PJM has pushed back against critics of its interconnection processes. In an April blog post, Paul McGlynn, its vice president of planning, noted that roughly 40 gigawatts of generation that PJM has cleared for interconnection have yet to move to construction due to ​“continued challenges with supply chain, financing, and local siting issues.”

Meanwhile, PJM’s reform effort ​“is working,” he said. ​“PJM will process enough renewable and other generation in the next few years to effect profound change,” with an expected 74 gigawatts of projects set to come online this year and next.

Critics disagree with this assessment. They note that PJM has only recently undertaken interconnection reforms that other grid operators pursued years ago, such as switching from studying proposed projects in a one-at-a-time ​“serial” basis to studying them in more streamlined ​“clusters.” And clean energy groups have challenged PJM’s most recently proposed interconnection reforms, saying they don’t comply with the minimum standards set by federal regulators last year.

PJM has also failed to engage in the long-range grid-planning efforts that have helped grid operators in the Midwest, California, New York, and Texas build out transmission lines. A report from think tank RMI found that PMJ’s spending on new transmission lines decreased by 67 percent from 2014 to 2022, and most of what was spent went toward lower-voltage lines rather than the higher-voltage corridors needed to bring more clean energy online.

Because PJM hasn’t been proactive, solar, wind, and batteries — cleaner and cheaper alternatives to its incumbent generation fleet — can’t hope to be brought online quickly enough to respond to rising capacity prices, Rutigliano said. The projects that are beginning construction in PJM’s region this year first applied for interconnection about five years ago, he said. ​“If somebody saw those prices and had something shovel-ready and applied right now, they’re not going to be in service until 2028.”

“This is not a price signal,” he said. Instead, ​“it’s a windfall” for the fossil-fuel and nuclear power-plant owners that reap the lion’s share of higher capacity payments. That’s bad for solving PJM’s reliability problems with lower-cost resources — but it’s good for incumbent generation owners.

“Any PJM member who owns fossil fuel plants has every incentive to slow-walk interconnection and transmission reform right now,” Rutigliano said. ​“They’re the suppliers in a market that’s very rich for them now. They would do anything to delay new entry and competition.”

The cost of failing to fix the impasse

The cost of these delays is ultimately borne by households and businesses on their utility bills.

NRDC estimates that PJM’s capacity bill will rise from $2.4 billion to about $14.7 billion due to the results of last week’s auction. That could increase wholesale energy costs by as much as 29 percent starting in mid-2025, when the capacity purchased in that auction is due for delivery, Rutigliano said.

Determining how those capacity price increases will affect the retail electricity rates that utility customers pay is complicated, since those rates also cover other costs like building and maintaining utility power grids. But some of the region’s biggest utilities are forecasting a steep impact.

In an August 1 earnings call, utility holding company Exelon reported that it expects PJM’s capacity price spikes will drive significant rate increases for the 10.5 million customers of its six utilities in Illinois and the mid-Atlantic region. Some of those utilities located in pockets of PJM that saw even higher capacity prices, including Baltimore Gas and Electric (BGE), could face double-digit rate increases.

“We, PJM, and other stakeholders have been signaling concerns about resource adequacy for some time,” Exelon CEO Calvin Butler said during the earnings call. ​“The price signals … clearly indicate a need for infrastructure investments in our footprint, particularly in BGE, both generation and transmission.”

That infrastructure investment takes time, however — and meanwhile, PJM may be compelled to pay uneconomic fossil-fueled power plants to stay open to maintain reliability. That’s what’s happening in Maryland, where PJM has issued ​“reliability must-run” offers to the Brandon Shores and H.A. Wagner coal power plants, essentially paying them to delay their planned closures until it can fast-track transmission projects to fill the reliability gap their retirements would cause.

Rethinking reliability metrics for fossil fuels, renewables, and batteries

Adding to the problems PJM faces is the fact that the fossil-gas-fired power plants that make up the majority of its capacity resources have been shown to be far less reliable than previously assumed during extreme weather events.

Last year, PJM imposed new capacity market rules that significantly reduced the grid operator’s assumptions about how much of a power plant’s total capacity should be considered to be reliably available during future grid emergency events, a metric known as effective load-carrying capacity (ELCC). For gas plants, that value was reduced from about 95 percent of their total generation capacity to about 80 percent, Rutigliano said.

That reform was driven by the poor performance of power plants during winter storms, including 2022’s Winter Storm Elliott, when PJM lost nearly 25 percent of its power plant capacity, with gas-fired power plants making up the majority of the lost power.

“PJM has been sitting on this hidden reliability problem, because gas just sometimes fails in the winter,” Rutigliano said.

One effect of this change was to reduce the total number of megawatts available to be bid to meet the targets that PJM sets for how much capacity it needs.

In market terms, that means the new rules reduced the amount of supply to meet an increasing amount of demand — a dynamic that almost certainly played a role in driving up prices. ​“So a big part of this price spike is now covering the winter risk that’s been there all along, but now we’re squarely facing it,” Rutigliano said.

PJM’s new rules also reduced the ELCC values for wind and solar power, Gordon noted.

One factor that handicaps renewable resources on this measure is that solar power is most reliable during sunny summers, while wind turbines tend to produce the most power during the winter. But PJM’s capacity market rules require bidders to submit bids that cover both seasons, forcing wind and solar power operators to find a ​“matching” set of resources to counterbalance their seasonal weaknesses.

To be clear, the tiny portion of wind and solar connected to PJM’s system means that these seasonal valuation issues haven’t had a significant impact on capacity auction prices, Gordon said. But to prepare for a future of increasing levels of renewable energy, PJM should carry through with long-promised reforms to create seasonal markets, he said.

Grid batteries that can store wind and solar power also need to be properly accounted for, Rutigliano said. Last week’s auction saw the first-ever ​“clearing” of about 1.4 gigawatts of battery capacity, he said, ​“which isn’t enough to matter” in a market with a peak load forecast of nearly 154 gigawatts.

But the massive expansion of battery storage capacity on the renewables-rich grids of California and Texas — and the important role those batteries have been able to play in helping cover the peak grid demands in those states — indicates a path that PJM could pursue to replace traditional power plant capacity with capacity supplied by batteries, wind, and solar, he said.

PJM’s next capacity auction is scheduled for December 2024. ​“The prices we’re seeing here should attract storage,” Rutigliano said. ​“But PJM is just so paralyzed.”