PJM Interconnection and Pennsylvania Governor Josh Shapiro have settled a lawsuit over PJM’s capacity market pricing, agreeing to lower the grid operator’s auction price cap from over $500/MW-day to $325/MW-day. The move comes as PJM acknowledges a capacity shortage could affect its system as early as the 2026/2027 delivery year.
The agreement announced on Jan. 28 stems from a complaint Shapiro in December, alleging that PJM’s capacity market design has failed to ensure just and reasonable rates. While intended to ensure long-term reliability, the design has instead enabled extreme price volatility that imposed excessive costs on consumers without guaranteeing sufficient new generation, it claims.
At the heart of the issue is PJM’s July 2024 Base Residual Auction (BRA) for the 2025/2026 delivery year, in clearing prices, surging from $28.92/MW-day in the prior auction to $269.92/MW-day—an outcome the complaint suggests is artificially inflated and untethered to actual supply and demand conditions. The state warned that if no action is taken, the 2026/2027 auction will be “the most expensive” in capacity market history, estimating that ratepayers could be on the hook for up to $74 billion in avoidable costs over the next two years.
Under the agreement on Tuesday, PJM will submit a formal filing Section 205 filing under the Federal Power Act, seeking FERC approval for a cap-and-floor mechanism to stabilize capacity prices. However, the measure remains subject to consultation with PJM members and approval by the PJM Board of Managers.
“PJM did the right thing by listening to my concerns and coming to the table to find a path forward that will save Pennsylvanians billions of dollars on their electricity bills,” said Gov. Shapiro in a statement on Tuesday. “My Administration will continue to work to ensure safe, reliable, and affordable power for Pennsylvanians for the long term.”
Pennsylvania’s Claim: ‘Largest Unjust Wealth Transfer’
The measure marks a new hurdle for PJM, the largest regional transmission organization (RTO) in the U.S., which is grappling with multiple uncertainties, including soaring load growth within its 13-state footprint. While the RTO’s capacity market—or —is just one of several wholesale power markets PJM manages, the BRA functions as a bellwether for future investment needs, grid reliability, and the overall health of the power supply system in the region.
As a whole, in each BRA, PJM aims to procure a target capacity reserve level for the RTO in a “least-cost” manner while also taking into account reliability-based constraints on the location and type of capacity that can be committed. , the significantly higher prices in the 2025/2026 auction results point to several concerning trends, including a tighter supply/demand balance. A major driver behind the market imbalance is unforeseen demand growth from data centers and industrial electrification, which has pushed PJM’s peak load forecast up by more than 8,000 MW since 2022.
In its complaint in December, however, Pennsylvania claims that PJM failed to clear new capacity at a sufficient rate, in part due to a record-breaking interconnection backlog of 3,300 projects. It notes that even PJM’s own Reliability Resource Initiative (RRI) reforms will not allow substantial new generation to come online until 2029 or 2030, alleging that current price spikes cannot stimulate timely investment.
The state warned that without a change in pricing policy, consumers will be locked into exorbitant costs while waiting years for new capacity to materialize. The complaint underscores that PJM’s pricing structure fails to create a rational market response but instead leads to unpredictable price volatility detached from economic fundamentals.
A core structural flaw identified in the complaint is PJM’s reliance on the Gross Cost of New Entry (Gross CONE) pricing model—which values total annual net revenues a new generation resource needs to earn on average to recover its capital investment and annual fixed costs, given reasonable expectations about future cost recovery over its economic life. For the upcoming 2026/2027 auction, “that cap has been raised—for the first time—to the greater of 1.75 times PJM’s estimate of the Net Cost of New Entry or PJM’s estimate of the Gross Cost of New Entry,” the complaint says. “Increasing the cap in this way was primarily meant to guard against over procurement that is no longer as meaningful a risk and assumes (and makes sense only when) market participants can respond to the clearing price with new entry. When, as now, that is not true, the cap cannot achieve its intended purpose,” it says.
“In fact, over the last four years, each of the principal motivations for introducing the higher cap to be used in the next auction has vanished,” it adds. “Allowing a capacity auction to proceed with a cap that, because of changing real-world circumstances, fails to protect consumers across the PJM region from bearing astronomical costs that will not produce a commensurate benefit gravely undermines public confidence in the essential fairness of PJM’s capacity market and is unjust and unreasonable.”
In its complaint, Pennsylvania proposed reducing the price cap to 1.5 times Net CONE until the next quadrennial review. It said a key goal should be to balance reliability incentives with fair consumer pricing, and to ensure that high costs are tied to actual supply constraints rather than artificial distortions. The state urged FERC to act swiftly to prevent further damage to consumers and the broader market.
The in December, notably, received backing from several key stakeholders, including governors from four PJM states—Illinois, New Jersey, Maryland, and Delaware—as well as consumer advocates and the Organization of PJM States (OPSI). However, several energy industry stakeholders have filed protests or motions to intervene, signaling concerns over the settlement’s impact on market operations and investment incentives. These include the Electric Power Supply Association, a trade group representing competitive generators, andPJM Power Providers Group, alongside competitive generators Constellation, NRG, LS Power, and Calpine.
PJM Fielding Capacity Shortage as Early as 2026/2027 Delivery Year
For its part, in response to the complaint, noted that it shares the concern about rising prices caused by the supply-demand imbalance, noting that it has taken multiple steps to mitigate it. “These include already asking our federal regulator for permission to lower the market price cap discussed in the governor’s complaint and proposing to allow for more shovel-ready generation projects to be added to the grid expeditiously,” it said.
The grid operator underscored that it has repeatedly warned of growing risks to power system reliability. “We have been warning for over two years of the prospect that parts of our country could run short of power during high demand periods,” it said. “This possibility has been growing, primarily as a result of state and federal policy decisions that are pushing generators to retire prematurely, and also due to unprecedented and rapidly growing data center construction. This risk is not limited to the grid managed by PJM. Therecently found that large areas of our country face this prospect.”
The stakes have continued to escalate. , PJM Board Chair Mark Takahashi warned that a capacity shortage could emerge as early as the 2026/2027 delivery year. Takahashi cited a rapidly tightening supply-demand balance driven by accelerating electrification, data center expansion, the rapid retirement of thermal generators, and the slow entry of replacement generation. He noted that while PJM has a significant interconnection queue backlog, “a high proportion of the queue consisting of intermittent resources that don’t have the same capacity value and operational characteristics as the retiring thermal generating fleet.”

To try and mitigate the risk of such an outcome, “the Board supports the efforts outlined here that are intended to (1) bring capacity online more expeditiously through the interconnection queue; and (2) make sure price signals accurately reflect current supply-demand fundamentals,” he wrote. The letter outlines several reforms that are underway:
- Capacity Interconnection Rights (CIR) Transfer Reforms. To accelerate new generation, PJM has kicked off an expedited process that allows replacement projects to inherit CIRs from retiring plants. The reform “better aligns the timing of de-energizing deactivating resources and the energizing of their replacements,” the Board explained. PJM will make the filing early in 2025.
- Surplus Interconnection Service (SIS) Changes. PJM is streamlining SIS rules to allow new generators to utilize existing, unused interconnection capacity without triggering lengthy grid upgrades. An example of a resource pairing utilizing SIS is a renewable resource combined with battery storage. “By taking a less restrictive approach to SIS, PJM will be in a better position to maximize system benefits and enhance resource adequacy without the need for additional network upgrades,” the Board said.
- Reliability Resource Initiative (RRI). PJM’s Reliability Resource Initiative (RRI) is a temporary, high-priority measure to expedite the interconnection of a limited number of “shovel-ready” generating resources not currently in the Transition Cycle #2 (TC2) queue. PJM says the initiative is “fuel and technology neutral” and allows all generation types, including renewables, to apply. Selected projects “will be required to participate in the Reliability Pricing Model (RPM) auctions for 10 delivery years.” In response to stakeholder feedback, PJM reduced the number of eligible projects from 100 to 50 and revised scoring criteria to “add locational value” and ensure all resource types are considered. “This proposal reflects the growing urgency to connect generating resources that have a high likelihood of being able to materially support resource adequacy and maintain grid reliability in the near term,” PJM explaiend. The filing for the was made Dec. 13, it noted.
- Capacity Market Adjustments. Finally, PJM is making targeted changes to improve price signals while ensuring reliability. “PJM is consistently seeking to perfect this marketplace because it is conscious that consumers ultimately will pay for the auction’s results,” the Board said.
Reforms include:- Retaining dual-fuel combustion turbines (CTs) as the reference technology (rather than combined cycle gas technology, which FERC accepted for implementation starting with the 2026/27 BRA) for capacity pricing to “mitigate the steepness” of the demand curve.
- Standardizing a uniform non-performance charge rate to align penalties across PJM’s footprint.
- Adjusting the treatment of Reliability Must-Run (RMR) units so their costs are partially offset in the capacity market.
- Removing reactive service revenue from energy market offsets in compliance with FERC Order No. 904.
PJM said it filed with FERC on Dec. 9.
- Further Market Design Reforms
PJM is also evaluating:- Enhancements to the Effective Load Carrying Capability (ELCC) framework to better measure capacity contributions.
- A sub-annual market construct to improve flexibility.
- A must-offer requirement for all resources with CIRs to ensure capacity availability.
Despite these measures, PJM’s Board acknowledges more work remains. “We do not expect that these filings, taken in aggregate, will fully resolve the resource adequacy challenge that we are facing, but we believe we must take the entire suite of actions to address the immediate reliability need,” said Takahashi. “We expect for PJM and the stakeholders to continue to deliberate and act on this issue of utmost criticality and to bring their best proposals forward.”
—Sonal Patel is a POWER senior editor (, ).