In a pivotal move that will shape electricity pricing across the PJM Interconnection region for the years to come, the Federal Energy Regulatory Commission (FERC) has approved the introduction of a capacity market price cap and collar for the 2026/27 and 2027/28 delivery years. This decision places defined upper and lower bounds on the clearing price of PJM’s Base Residual Auctions (BRAs), the auction mechanism used to secure future capacity for the grid. For energy brokers, commercial users, and generation asset developers operating in the PJM region, understanding this shift is critical. It not only affects future auction results and procurement costs but also signals a broader effort to balance cost predictability with the need for long-term grid investment.
What FERC Approved
The core elements of the ruling for PJM’s BRAs include the following:
- Price Cap: $325 per megawatt-day
- Price Floor (Collar): $175 per megawatt-day
- Applicability: Capacity delivery years 2026/27 and 2027/28
Before this ruling, the PJM auction models forecasted prices that could exceed $400-$500/MW-day in certain regions, prompting concern from public officials and consumer protection agencies. FERC’s decision creates a bounded pricing structure that reduces volatility but comes with trade-offs for higher market prices for the next several years.
Why The Cap/Collar Was Proposed
The cap and collar aims to offer price stability during this turbulent phase of infrastructure transition and market redesign. Several key drivers led to this unprecedented market intervention:
Price Spike Pressure
Rising auction clearing prices raised alarms for large end-users and municipalities. The 2025/26 PJM BRA cleared prices at nearly 5x more than the then-current capacity rates. This increase sent shockwaves across the market, prompting many to push PJM for a broader solution.
Policy Response
Pennsylvania Governor Josh Shapiro and other state officials urged PJM and FERC to rein in capacity costs in the short term in an effort to protect ratepayers from surging electricity bills. Shapiro sued PJM with the hopes of curtailing future capacity prices after the 2025/26 auction results.
Infrastructure Constraints
With PJM’s interconnection backlog and growing demand from data centers, long-term planning is in flux. The new price floor encourages new investment from generation developers to bring much-needed capacity online in the region. Furthermore, the future commitment to elevated prices incentivizes demand-reduction programs from the consumer side, such as DR, load shifting, and peak load shaving.
Market Stakeholder Reactions
The proposal drew a mixed response:
- Opposition: LS Power and PJM’s independent market monitor expressed concern that capping prices could suppress investment in new generation, especially as older fossil fuel plants retire. Furthermore, they argued that the cap disincentivized battery storage developers from entering the market, a much-needed technology to support PJM’s reliability efforts.
- Support: FERC commissioners, some state governments, and certain generator interests supported the compromise as a pragmatic way to avoid immediate cost shocks for consumers. FERC ultimately described the cap and collar as a “reasonable, temporary mechanism” to protect consumers without permanently distorting market dynamics.
Implications For Market Participants
For energy managers and brokers, here’s what the decision means for your customers:
- Short-Term Cost Control: The cap may prevent unexpectedly high capacity charges in the next two BRAs; however, the floor means that the days of $50/MW-day capacity rates are long gone.
- Potential Investment Drag: Developers may delay new generation or storage projects if price signals remain muted. This could equate to rising commodity costs, higher energy futures markets, and ultimately, more expensive energy costs for consumers.
- Tighter Planning Windows: With PJM’s auction schedule now compressed to annual auctions for the following delivery period, there’s less time for developers to respond to auction signals or adjust offer strategies. This could mean less participation in capacity auctions and higher capacity prices in the future.
Behavioral Shifts: Retail energy suppliers may game capacity offers to hover near the collar in their pricing models. Suppliers may also find new ways to structure contract language to allow them to pass through unexpected capacity increases. This could mean higher than expected electricity bills for your customers.
What Comes Next For PJM?
This decision is not the end of PJM’s capacity market reform. In fact, there are many initiatives on the horizon.
- Capacity Market Inputs: PJM must now revisit its demand curves and modeling assumptions that determine auction outcomes. With growing demand and limited generation in the queue, PJM could potentially rework its auction model pricing completely.
- Queue Reform: A major overhaul of PJM’s generation interconnection queue is expected later this year, which may relieve long-term capacity pressures. This overhaul is designed to bring new generation online in a more streamlined and faster manner.
- The 2026/27 Auction: Brokers should prepare for the 2026/27 auction to take place in early July with added scrutiny. Market dynamics, load forecasts, and infrastructure additions will shape whether prices settle near the cap, collar, or somewhere in between. Ultimately, these prices will play a pivotal role in the future of the PJM energy market for the next two years.
Strategic Takeaways For Energy Brokers & Buyers
Understanding the new PJM capacity collar isn’t just about being informed. It’s a forward-looking procurement tool. Here’s how to apply it to reduce energy costs for your customers or at your business.
- Procurement Timing: Locking in capacity-inclusive electricity contracts before auctions occur can expose you to unnecessary costs. Some suppliers will not bilaterally true-up capacity payments in fully-bundled fixed-rate contracts. If you lock in a price today based on the 2025/26 capacity prices, and future auction results are lower, you could get stuck paying more for capacity than is necessary. It’s advised to pay for capacity as a pass-through charge until the market becomes more stable.
- Budget Forecasting: With a clear price ceiling and floor, brokers can model worst and best-case scenarios for energy strategy and budget planning. Although prices will be much higher for the years to come, the cap and collar order brings some sort of price certainty to the mix when forecasting costs.
- Risk Mitigation: For large buyers, participating in capacity tag reduction programs, such as demand response, or installing on-site generation can help to offset future costs.
Prepare Now For PJM’s Changing Capacity Market
FERC’s approval of a PJM capacity cap and collar for 2026 – 2028 provides temporary pricing relief, but it also adds complexity to long-term energy procurement strategies. As capacity markets evolve, energy professionals must adapt their strategies accordingly. At Diversegy, our team of energy market experts has decades of experience helping our clients navigate volatile energy markets. Contact us today to assess how these market shifts affect your energy portfolio. Our advisors can help you optimize procurement timing, interpret auction outcomes, and align your risk strategy with changing PJM dynamics.
