Electricity customers in Maryland could see their bills jump by almost 20% next year. The price spike isn't isolated to that state -- an entire region that includes a large chunk of the Mid-Atlantic and Midwest could feel a similar squeeze.
The reason has to do with an obscure piece of the utility market that few customers have probably ever heard of: an energy capacity auction. In simple terms, these auctions allow electric grid operators to lock in (and pay for) generation from power plants, usually for the following year.
"This is the price we're paying now to make sure these resources are available when we need them," said Chris Postma, senior adviser at POWER Engineers.
The entity that covers all or part of 13 different states, PJM Interconnection, saw its expenses increase almost tenfold in a capacity auction this year, and some of that cost will be passed onto consumers.
Here's what you need to know about why electric rates might go up in your part of the country.
What is an energy capacity auction?
Large swaths of the country manage their electrical systems through something called an independent system operator. These organizations oversee electricity grids in specific geographic areas, and one part of their job is an energy auction.
Each ISO is different, but usually these energy auctions happen annually. The purpose of an energy auction is to allow the ISOs to reserve a certain amount of power generation from power plants for the following year. It's essentially an "insurance policy" to make sure a given area will have enough power to meet customer demands, according to Jeff Varness, an adviser at POWER Engineers.
For grid managers, this involves finding affordable power generation options that already exist, while also funding the construction of new power plants, according to Sara Mochrie, senior vice president, earth and environment power market, for engineering firm WSP. It's a balance of meeting near-term needs and supporting projects that will pay off in the long run, she said.
These energy capacity auctions, while they may seem boring, matter a lot. "When you flick a switch, do you like your lights to come on?" Postma said.
What happened in the PJM Interconnection auction?
PJM Interconnection covers an area that includes all or parts of Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and the District of Columbia.
In its capacity auction in July, PJM reported some eye-popping cost increases. The grid operator will pay $14.7 billion for power in the 2025/26 delivery year, compared to $2.2 billion in the previous auction. Put another way: The new cost for power is $269.92/MW-day -- almost ten times higher than the $28.92/MW-day in the prior auction.
Why are we paying so much more for power?
Experts say there are a few big factors that are making these prices skyrocket.
Huge growth in power demand
The amount of power that customers and businesses are demanding in the PJM area is not stable from year to year: It's increasing, fast. A combination of home electrification, new domestic manufacturing and more energy-hungry data centers are driving power demand way up, according to Postma.
This makes it harder (and pricier) for grid operators to reserve all the power they need because they're competing with other parts of the US, Mochrie said.
Generation challenges
At the same time that PJM customers want more power, it's getting harder to generate it. "Everything's just crashing into it," Postma said. That's because dirty fossil fuel plants, like coal, are being retired, while new energy sources face complicated permitting processes and can be expensive to build, Mochrie said.
The supply-chain issues of the pandemic drove up prices for complements and labor. "All of those things [increased] 10-15-20% after Covid, and they've never come back down," Mochrie said.
Critics of PJM have said another issue is mismanagement within PJM itself. Some point to a long "waiting list for generation projects looking for permission to connect to the grid," which are being held up by PJM itself, according to Michigan Advance. A PJM spokesperson told the news site that "the organization has been working hard to fix its interconnection process and clear the backlog."
Others accuse legacy operators like PJM and local utilities of "dragging their feet" on the implementation of renewable energy sources, like solar and wind.
"PJM has the tools in its toolbox to bring down prices and ensure a reliable, clean supply of electricity for years to come. If it acts now, these price increases can just be a bump in the road to a more affordable, resilient grid," wrote Claire Lang-Ree for the Natural Resources Defense Council.
How does this affect electricity bills?
The good news: The tenfold increase in costs for PJM will not translate directly to tenfold spikes in consumer energy rates.
"It's not a one-one, and it's going to vary," said Postma. A report from the state of Maryland predicts customer bill increases of around 10-20% next year as a result of the PJM auction, but that will look different in different states.
That's because there are many steps between a capacity auction and the rates customers see on their bill. For one thing, utilities within the PJM area each operate differently, and they need to get approval from regulators before passing on cost increases to customers; usually, they can only pass along a certain fraction of those costs, Mochrie said.
But while the exact amount of increase will vary, one thing looks pretty certain: If you live in the area that PJM covers, your electricity bill is probably going to go up.
What does this mean for the rest of the country?
PJM is not the only grid operator dealing with these challenges. "It's a predecessor to what I assume is going to be an accelerating trend," Postma said.
Indeed, the increases in demand and challenges of the clean energy transition are playing out all over the country. No matter where you live, more people are plugging in EVs and electrifying their homes and asking more from technologies, like AI, that rely on data centers.
"You can't continue to have all the demand on the grid without understanding we have to pay for it somewhere," Mochrie said. "That doesn't come without added costs."
The next capacity auction that comes to your neck of the woods, then, is likely to see some significant cost increases -- which are then going to trickle down to your utility bill.
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