PJM 2028/29 Auction Clears at Cap for Third Straight Year as Supply Shortfall Persists; Ratings Agency Pressure and FERC Show-Cause Orders Raise Regulatory Risk Going Forward

Investors closely monitored the latest PJM Base Residual Auction, or BRA, for the 2028/29 delivery year because of PJM’s status as the largest electricity regional transmission organization, or RTO, in the United States and the recent burgeoning demand for power from data centers. A persistent development from the last few BRA results is the scarcity of committed supply.

As widely expected, the 2028/29 BRA cleared at the cap price of $325 per megawatt-day, or MW-day. All locational deliverability areas, or LDAs, within the PJM Interconnection cleared at this price. For context, PJM implemented both a price cap and floor for the previous two auctions and extended those parameters to this auction and the next one in December 2026 to help curb volatility in power prices. The 2028/29 BRA ultimately cleared 138,317.8 MW of unforced capacity, or UCAP, which represents a generation resource’s maximum output adjusted for its estimated ability to reliably perform at times of highest system risk.

When combined with 10,863.8 MW of UCAP from the resources from the fixed resource requirement, PJM estimated the total amount of resources procured to be 6,831.3 MW short of its reliability requirement, or the estimate of how much capacity is necessary to prevent a loss of load expectation of no greater than one day out of every 10 years. For context, PJM raised the RTO reliability requirement from 152,400 MW of UCAP to 156,013 MW due to a forecast increase in additional large loads of 1,374.5 MW. The total reserve margin declined by 20 bps since the last auction to 14.7%, which is below the 20% margin stipulated by the reliability requirement and represents the lowest level across the last 10 auctions.

New generation plus uprate bids into the auction decelerated to 524.7 MW of UCAP, which declined 32.2% since the previous auction and represents the lowest figure over the last 10 auctions as shown below.
 

These trends continue to demonstrate that supply in PJM has been unable to keep in pace with demand. PJM insisted that “such a shortage [in supply] does not necessarily mean that the PJM system will be unable to serve load reliably in the delivery year; it means that PJM would have to operate with slimmer reserves and greater level of risk.”

The credit implication of this auction’s results is positive for several prominent independent power producers in our sector coverage including Talen Energy, which operates in PJM, though the benefits of locking in revenues at a high clearing price are likely to be muted given these results were in line with market expectations.

Concerns over regulatory risk have grown in recent months, especially given the historically low reserve margin and rapid acceleration in clearing prices. The latter point is especially pertinent after the latest Consumer Price Index inflation report highlighting electricity prices as one of the fastest-growing components in the consumer basket. PJM also estimated that the clearing price would have been $554.72/MW-day for the entire RTO had there been no cap.

Furthermore, ratings agencies have recently taken a more negative view on the utilities sector with Fitch Ratings notably lowering its outlook for North American utilities and power issuers from “neutral” to “deteriorating” due to affordability concerns potentially complicating utilities’ rate recovery. In April, Moody’s Ratings placed PECO on downgrade watch following the utility’s withdrawal of its rate case in Pennsylvania and S&P Global Ratings downgraded Baltimore Gas & Electric’s issue rating from A to A-, both of which operate in PJM.

PJM previously stated that the current capacity auction mechanics ultimately do not address the underlying supply and demand imbalance, and that “addressing that challenge requires either bringing more resources onto the system or moderating the pace of demand growth.” Investors will be monitoring PJM’s response to the Federal Energy Regulatory Commission’s show-cause orders request to each of the grid operators released on June 18, which gives each of the grid operators a 60-day deadline to either justify why their current large-load tariffs remain “just and reasonable” or propose changes that address several key power market concerns.

For further discussion on PJM market dynamics, view the replay of Octus’ latest webinar on “Powering the AI Boom: Risks and Opportunities in Data Centers.”

The table below summarizes key results from the last five auctions:
 

The table below summarizes the geographic distribution of cleared UCAP from the 2028/’29 auction: