Gov. Josh Shapiro is pushing back against a surge in home electricity costs that will hit Philadelphia residents along with 65 million ratepayers in the Mid-Atlantic and Great Lakes regions, including Pennsylvania, New Jersey and Delaware.
In the Philly area, ratepayers are expected to see their monthly bills climb 10% over two years, starting this July. That’s because of an increase in certain electricity generation fees, called capacity costs, that the region’s power grid operator, PJM Interconnection, announced last year.
The increases will come on top of a 10% rate hike for PECO customers that went into effect this month and another smaller PECO increase slated for next year, both approved in a separate regulatory process by the Pennsylvania Public Utility Commission.
The higher capacity costs are already baked in and can’t be appealed at this point, according to energy policy experts. They resulted from a capacity auction last year involving power-generating companies across PJM’s 13-state plus D.C. service area.
The auction determines how much power plants will be paid, not for electricity per se, but rather to ensure there’s always enough electricity available to customers, especially during extreme weather events. Over the next two years those payments will jump from $2.4 billion to $14.7 billion, and ratepayers are on the hook.
But now the Shapiro administration and consumer advocates from several states are seeking help from a federal agency to prevent continued price hikes. The Federal Energy Regulatory Commission (FERC) oversees interstate transmission and sales of electricity. Pennsylvania’s lawsuit argues PJM’s auction process is broken and asks FERC to force the grid operator to bring down future power costs. As things stand now, power companies will be paid much more without much benefit to customers.
“Pennsylvania ratepayers face potentially the largest unjust wealth transfer in the history of U.S. energy markets due to PJM Interconnection LLC’s capacity auctions,” the administration wrote in a FERC complaint filed Dec. 30. PJM’s current process for setting capacity costs is “misfiring, producing record price increases that do not benefit consumers or assure grid reliability.”
Lawyers for the state argue that requiring PJM to lower its cap on future capacity costs could prevent $20 billion in additional bill hikes in 2026 and 2027, including $4 billion for customers in Pennsylvania.
An obsolete pricing model favors producers and hurts consumers
The underlying issue is that Valley Forge-based PJM has done a poor job over the past several years of managing the transition from coal-fired power plants — which contribute to climate change and are being phased out — to new, renewable sources that are attempting to plug into the grid, experts say.
“Originally they were tooled up to handle small numbers of applications from traditional, large power plants, and they started instead seeing hundreds and hundreds of applications from smaller solar, storage and wind developers, and their process wasn’t able to handle it,” said Tom Rutigliano, a senior advocate at the nonprofit National Resources Defense Council. “Their process basically seized up.”
When a company decides to build a new generating plant, it applies to PJM and waits — typically for years — for approval to join the grid. Once it gets approved, and if the project still pencils out, the company pursues local building permits and financing, and constructs the plant.
PJM’s process is so backlogged that it’s about to start processing applications filed in 2021, Rutigliano said. The bottleneck has slowed plant construction across PJM’s territory, which covers all or part of 13 states and the District of Columbia. According to PJM, more plants are needed to accommodate the growth of AI data centers and other new users, and there could eventually be insufficient capacity during a cold snap or heat wave.
In addition to managing the growth of the grid, PJM runs capacity auctions. Capacity costs are fees that power companies receive for keeping their plants available at all times, even when demand is low and they wouldn’t otherwise be making money.
The system provides a kind of insurance for the consumer, ensuring enough power is available to keep the lights on when demand is high, during the hottest and coldest days of the year. Ratepayers have always paid for that insurance as part of their monthly bill. But several factors have led to the high jump in capacity fees recently.
The rules and caps governing capacity auctions are supposed to allow prices to rise high enough to make sure plants are reliably available to produce electricity as needed without gouging consumers. Because capacity auctions are supposed to happen well in advance of the period when the fees are paid out, they also help companies predict their future finances and plan new projects.
Last year, however, the rules led to an unintended result. A July capacity auction resulted in a projected total capacity cost of $14.7 billion for 2025-2026, compared to just $2.4 billion for the previous year. Starting this summer, PECO and other utilities will pass on those higher costs to consumers as part of their monthly electric bills
The battle over costs
In the complaint, the state says PJM’s cap on capacity costs is too high, and it asks FERC to order the grid operator to use a different formula to determine the cap and protect consumers.
Part of the argument is that high capacity costs aren’t achieving their goals, and are thus pointlessly enriching generating companies and draining customers’ bank accounts.
High pricing is supposed to incentivize companies to build more power plants needed for the expected increase in demand, but PJM is so glacially slow to approve projects that they can’t, Pennsylvania says in its complaint. Rutigliano said the interval from application to the start of construction should be about 18 months, but currently it’s six years.
That could result in fewer new power plants and less economic growth in the grid area, and increase the risk of blackouts during storms, experts say.
In addition, PJM has lately been holding auctions every year, instead of every three years as intended, making them useless for the companies’ long-term planning, the state says, and essentially eliminating the incentive to make new investments in power generation.
“The ballooning delays in PJM’s interconnection queue and increasingly compressed auction timelines conspire to foreclose any realistic possibility of market participants responding to the auction’s clearing price,” the complaint says.
Last month, PJM proposed a couple tweaks to its pricing model that should result in lower future capacity costs, but the state contends they won’t make enough of a difference.
In a response to Shapiro, the grid operator says it’s already asked for permission to lower the auction cap and to more quickly add “shovel-ready” power plant projects to the grid. It says it has approved many new renewable projects, although most haven’t been built because of external factors like permitting and financing issues.
PJM’s statement warns of the prospect of power shortages due to insufficient supply and rising demand, rather than focusing on the cost to consumers.
“We remain open to additional solutions to this generational challenge, as long as they support keeping the lights on. Service interruptions, brownouts and blackouts cannot be an option,” the statement says. “We have had productive engagement with the Shapiro administration and all of our states to date, and we appreciate their active engagement and advocacy.”
A rocky transition to renewable energy
While Shapiro’s complaint is focused on the costs of power, it has stoked ongoing arguments over the broader transition to renewable power sources and the impact on Pennsylvania’s energy industry.
Pa. Senate Majority Leader Joe Pittman, a Republican, used the opportunity to criticize the administration’s legal battle over the Regional Greenhouse Gas Initiative, an interstate program to reduce carbon emissions and fight climate change.
While Shapiro favors participating in a different cap-and-trade system than RGGI, he has appealed court decisions favoring opponents of the initiative, saying he is trying to protect the governor’s executive authority to join such compacts.
“If the governor is truly committed to protecting consumers, he should start by dropping his own lawsuit in defense of a program destined to increase the cost of electricity by nearly a half billion dollars annually,” Pittman said. He has called RGGI an “electricity tax” and said the state needs to promote power from fossil fuel sources, including coal and natural gas.
Renewable energy advocates, meanwhile, argue that PJM’s approach to calculating and satisfying demand for electricity continues to reflect a bias in favor of natural gas power plants, which exacerbate climate change, rather than cleaner, more reliable, and often cheaper forms of generation, like solar collectors paired with battery storage.
“Their justification is an exaggerated estimate of the growth that the region is facing,” said John Quigley, a former secretary of the Pa. Department of Environmental Protection and a senior fellow at Penn’s Kleinman Center for Energy Policy.
“There’s a lot of double-counting in the projections about how big the needs are going to be, how much AI is going to cost us, and how much electrification is going to add to generation demands,” he said. “There’s a lot of double-counting and, frankly, a lot of purposeful exaggeration to get to this stampede to gas.”
Find more stories about the effects of climate change at WHYY News’ Climate Desk.
