By Rick A. Veitch
PJM’s latest capacity auction yielded record prices for future supply, boosting producers’ cash flows and signaling stronger demand for electricity.
For nearly two decades, U.S. electricity demand remained stable as efficiency improvements offset economic growth. Now growth expectations are rising dramatically as society’s shift toward electrification-from electric vehicles to AI-tailored data centers-continues to intensify; meanwhile, more coal plants are being retired and intermittent renewable power sources can fall short during periods of peak power demand.
To ensure grid reliability, PJM Interconnection-a grid operator serving 13 states in the Midwest and East Coast-runs annual capacity auctions. In these auctions, power suppliers bid to be available to deliver electricity, at a certain price, up to three years in advance based on predicted energy demand. Securing those forward supply commitments helps grid operators ensure reliability in coming years.
At the end of July, PJM released record-setting auction results for the period covering June 2025 through May 2026: Compensation for future capacity hit $270/MW-day, more than 800% higher than during the previous auction and well ahead of market expectations.
We believe these compensation levels are sending strong market signals for the need for additional generation capacity, particularly natural gas-fired plants, which have dynamic dispatch capabilities. Standing up new power plants to meet additional demand won’t happen overnight-that’s why we expect PJM auctions to continue yielding healthy cash flows for power producers over at least the next few years.
In our view, demand for capacity will continue to benefit high yield bond and loan issuers in the utilities sector. Furthermore, as U.S. power grids strive to secure future reliability, we anticipate increasing opportunities to deploy capital in this sector at attractive yields.
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