Overpaying by Billions: Why PJM Should Transition to a Seasonal Capacity Market

Abstract

PJM’s annual capacity market structure creates a seasonal inconsistency in the market’s clearing process: the RTO derates its supply stack with ELCC class factors that accredit generators in accordance with their winter performance, but the resultant supply curve is intersected with a demand curve that is built to ensure the grid’s reliability during its peak summer demand hours. The market’s structure therefore overstates the magnitude of PJM’s capacity shortage, forcing the RTO to overprocure capacity at a high cost to its ratepayers. I suggest that PJM could eliminate this inconsistency by transitioning to a seasonal market. To support this conclusion, I mimicked a PJM ELCC study, producing annual and seasonal accreditation factors for each resource class. This study demonstrated that PJM’s annual accreditation factors are primarily influenced by the ISO’s winter reliability concerns. I then used these modeled ELCC factors to simulate the 2025/2026, 2026/2027, and 2027/2028 Base Residual Auctions under both annual and seasonal market regimes. This auction model found that operating separate winter and summer capacity auctions could have saved consumers billions in all three historical auctions. Transitioning to a seasonal market would restore the accuracy of the market’s signals and protect consumers from continued overpayment.