As PJM Interconnection, operator of the nation’s largest power market, kicks off its annual multibillion dollar capacity auction on July 9, a persistent supply-demand imbalance and major rule changes are setting the stage for another round of historically high prices. For market participants, including renewable generators, these dynamics point to a second-straight year of higher revenues and PPA prices.

For the upcoming auction, PJM aims to procure 146,105 MW of reliable, or unforced, capacity for the 2026/2027 Delivery Year starting in June 2026, a 1.1% increase from the prior auction. The large procurement target is a result of a high peak load forecast of over 159,300 MW – an eight-auction high – and a 19.1% installed reserve margin – the highest in over ten auctions. All of this comes as new capacity supplies in PJM have hovered at record lows. Auction results are to be published July 22.

PJM has implemented a price collar of $175/MW-day to $325/MW-day for this auction and the next. The aim of the collar is to curb price volatility following record highs in the last auction while still ensuring price signals are strong enough to attract investments in new capacity. Without the collar, PJM said, the range for the auction would have been $0 to $500/MW-day.

This auction marks the first time that renewable generators are mandated to participate. PJM has found that, with their higher penetration on the grid, these resources are an important tool for ensuring system reliability, especially as reserve margins thin. PJM also contends that continuing to exempt them could lead to inflated auction prices that fail to properly reflect supply-and-demand fundamentals in the market while also raising risks for market manipulation. Last auction, over 9,500 MW of solar nameplate capacity and 4,800 MW of wind nameplate capacity cleared, according to estimates.

Clean energy groups, however, have opposed the must-offer requirement over concerns that renewable resources will be unfairly exposed to potentially high non-performance penalties. They say that the risk of penalties could drive renewable generators out of the market, undermining PJM’s goals.

In a move to mitigate this risk, PJM has adjusted its penalty structure. Starting with this auction, PJM has lowered the financial penalties for generators that fall short of their capacity commitments, particularly during incremental auctions, when the deficiency is caused by a recalculations of their grid reliability value, known as Effective Load Carrying Capability (ELCC) class rating. Under the rule change, capacity deficiency charges will be capped at 100% of the auction clearing price, down from 120%. Class ratings, which are volatile, are periodically adjusted to reflect changing load forecasts and projected resource mixes, leaving renewable generators at risk of failing to fulfill their capacity commitments.