Why PJM’s Price Cap Costs Pennsylvanians

Pennsylvania’s electricity prices have increased 46 percent since 2018, and the grid that delivers that power is under unprecedented strain. The policies now being proposed to address the strain—including continuing the ceiling on capacity market prices—will deepen the underlying problems.

In December 2025, PJM Interconnection—the grid operator covering Pennsylvania, D.C., and twelve other states—held a three-year-ahead capacity auction that fell short of its reliability target for the first time in the organization’s history, indicating greater risk of blackouts during extreme weather.  Even with subsequent forecasting updates, the reliability requirement remains unmet.

Weeks later, Winter Storm Fern forced the U.S. Department of Energy (DOE) to issue emergency orders, authorizing generators to run beyond air-quality limits to keep the lights on. The grid is tighter than ever, and the price cap championed by Gov. Josh Shapiro is making the problem worse.

What the Capacity Auction Is—and Why It Matters

PJM runs two wholesale markets. One pays for the electricity delivered to homes and businesses. The other, the capacity market, pays power plants to be available when called upon.

Think of it like a restaurant. The energy market is like the front of the house, serving meals to hungry customers. Meanwhile, the capacity market operates like the back of the house, keeping the kitchen staffed, stocked, and equipped to cook, regardless of whether a single customer places an order that day.

We need both. When a winter storm hits and demand surges, you cannot build and stock a “kitchen” overnight. Every year, PJM holds an auction where generators bid to provide this readiness, determining what capacity will be available three years in advance. The price that clears the auction is the primary signal to investors about whether and to what extent the grid needs additional power-plant generation.

For several years, that signal was misleading. From 2022 through 2024, generators were paid $28 to $50 per megawatt-day—about 80–90 percent cheaper than today’s prices. This low-price range was likely the result of a combination of pandemic-era auction delays, federal regulatory churn over market rules, state subsidies that allowed some resources to bid below their true costs, and demand forecasts that had not yet captured the coming data center surge.

Those low prices sent generators a false signal to retire. And they did, accelerating plant closures just as demand was about to take off.

When supply and demand realities caught up, prices surged nearly tenfold, climbing from $28.92 to $269.92 per megawatt-day in the 2025–26 auction. Total procurement costs jumped from $2.2 billion to $14.7 billion.

The signal was now screaming: The grid needs more generation!

The Price Cap

In response to the spike, Governor Shapiro filed a complaint with the Federal Energy Regulatory Commission (FERC) in December 2024. A month later, he negotiated a settlement with PJM, capping capacity prices at about $325 per megawatt-day. PJM is now asking FERC to extend that cap through 2030.

The cap has a visible benefit: It limits what ratepayers pay for near-term capacity. But it has a hidden cost that is far more dangerous.

The capacity price is the centralized signal that incentivizes investors to build new power plants. Capping that signal is like capping thermometers at 100 degrees: The fever does not go away, and those suffering simply cannot see it.

There are serious questions about whether anyone can build new generation at the capped price, given that construction costs for power plants have risen substantially in recent years. But the deeper problem is that the flat cap also hides where the costs originate.

Before the cap, PJM’s auction did not produce one price for the entire grid. It resulted in higher prices in regions where capacity was genuinely scarce, reflecting local conditions driven by those regions’ own policies. In the last auction before the cap took effect (2025–26), Maryland’s BGE zone cleared at $466 per megawatt-day, Virginia’s Dominion zone at $444, and the rest of the grid at $270. Those premiums reflected real local shortfalls: Aggressive decarbonization mandates, cap-and-trade schemes, accelerated plant retirements, and explosive data center growth were concentrated in those states.

The flat cap erased those signals entirely. Since the collar took effect, capacity has cleared at one uniform price across the entire grid (roughly $330 per megawatt-day), regardless of whether its policies help or hurt grid reliability. Pennsylvania and Ohio ratepayers are effectively subsidizing the capacity costs created by Virginia’s and Maryland’s policies.

PJM’s own no-collar simulations confirm the scale of this cost socialization. The most recent auction (2027–28) would have cleared at $529.80 per megawatt-day without the cap. Virginia’s Dominion zone would have been the only constrained region, at $542.83. The gap between the capped price and the market-clearing price nearly tripled, from $59 to $196 per megawatt-day in just one auction cycle.

Higher-Capacity Prices: A Problem That is Its Own Solution

The cap does not eliminate costs. Instead, it redistributes them from the states causing the problem to the states that could solve it, ensuring the underlying problem worsens.

The economic logic is straightforward: Higher-capacity prices attract new-generation investment. More generation increases supply. More supply brings prices back down sustainably because the grid has the power plants it needs. The cap short-circuits this process: It holds prices down while supply deteriorates. That is why the 2027–28 auction was the first in PJM history to fall short of the reliability requirement. Lower bills purchased at the cost of blackout risk is not consumer protection.

The cap harms even the states it appears to help. If Virginia’s Dominion zone had to pay $543 per megawatt-day, that price would either attract new generation into Virginia or force the state to reconsider the policies driving the shortfall.

Meanwhile, Virginia is moving to rejoin the Regional Greenhouse Gas Initiative (RGGI), the multistate cap-and-trade program that imposes a tax on carbon emissions. This move will further suppress reliable in-state generation and increase its reliance on power imported from Pennsylvania and Ohio.

For Pennsylvania and other generation-exporting states, higher prices would reward the existing fleet, attract new construction, and generate the jobs that come with building power plants. Pennsylvania generators are receiving $330 per megawatt-day for capacity, but the market values it at $530 per megawatt-day. That is $200 per megawatt-day of suppressed revenue that would otherwise benefit Pennsylvania workers, plant owners, and communities.

What Pennsylvania Should Do

Pennsylvania’s grid does not need more price controls; it needs more power plants. The Commonwealth Foundation—alongside the Buckeye Institute, the Cardinal Institute for West Virginia Policy, and the Competitive Enterprise Institute—filed formal comments with FERC, opposing the cap extension. Pennsylvania lawmakers and regulators should take the same position.

Beyond rejecting the collar extension, Pennsylvania should build on its success in exiting RGGI. The Lightning Plan would bring Pennsylvania back to the same carbon-pricing approach, while mandating expensive, unreliable generation that would deepen the growing blackout risk. Pennsylvania should instead remove the energy mandates and taxes that continue to suppress in-state generation, and reform permitting to allow new power plants to be built. Each of these steps helps Pennsylvanians put their state’s natural advantages to work.

As the nation’s largest electricity exporter, Pennsylvania generates 40 percent more electricity than it consumes. The commonwealth sits atop the Marcellus and Utica Shale formations and possesses the transmission infrastructure, skilled workforce, and geographic position to lead the next era of energy investment. States that choose to suppress their own generation through carbon taxes and renewable mandates should bear the cost of that choice, not export it to Pennsylvania families and businesses.