Power producers sell future capacities at record prices

By Rick A. Veitch

PJM's recent capacity auction resulted in record prices for future delivery, boosting producers' cash flow and indicating stronger demand for electricity.

For nearly two decades, electricity demand in the United States remained stable as efficiency improvements drove economic Growth. Now, growth expectations are rising dramatically as society's shift toward electrification—from electric vehicles to AI-based data centers—gains pace, while more coal-fired power plants are being shut down and the availability of renewable energy sources may become scarce during times of peak electricity demand.

To ensure grid reliability, PJM Interconnection, a grid operator serving 13 states in the Midwest and East Coast, conducts annual capacity auctions. In these auctions, electric utilities bid to supply electricity at a specific price based on forecasted energy demand up to three years in advance. Securing these supply commitments helps grid operators ensure reliability in the years to come.

At the end of July, PJM published record-breaking auction results for the period from June 2025 to May 2026: compensation for future capacities reached $270/MW-day, more than 800 percent more than in the previous auction and significantly more than market expectations.

We believe these tariff levels send strong market signals of the need for additional generating capacity, particularly for natural gas-fired power plants that have dynamic dispatch capabilities. Building new power plants to meet the additional demand will not happen overnight, so we expect the PJM auctions to continue to provide healthy cash flows to power generators for at least the next few years.

We believe demand for capacity will continue to benefit issuers of high yield bonds and loans in the utility sector. Additionally, as U.S. power grids seek to ensure their future reliability, we expect increasing opportunities to deploy capital at attractive returns in this sector.

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