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In a press release PJM announced that it “launched an effort to rethink the future of its wholesale electricity markets with the publication of Powering Reliability Through Market Design.

“The report frankly assesses the current industry landscape of high prices, burgeoning electricity demand and reluctant investors, and catalogues the foundational decisions that will be required of industry and government to meet those challenges for the long term.”

The Report Presents Three Paths Forward

“PJM presents three distinct paths, each reflecting a different set of answers to these foundational questions. These paths represent some of the options available for further discussion but by no means are a complete set. They are intended to initiate constructive discussion that can eventually lead to more fully developed structures.

Path A – Stabilized Markets: Preserve the shared reliability compact by making it financially durable. Under this path, the capacity market continues, but the vast majority of load is required to be covered through long-term forward commitments either through mandatory Load Serving Entity (LSE) hedging requirements or through a PJM-administered, long-term procurement, such as a tiered, multiyear capacity market. In either case, the purpose would be to procure the vast majority of capacity needed to maintain resource adequacy prior to the final auction for the delivery period, or capacity spot market, so that it may clear at high scarcity prices when the system is short (maintaining the investment signal), but most load is insulated from those prices through forward contracts. This path trades the optionality of short-term procurement for the stability needed to support investment, and in doing so, seeks to avoid the credibility trap.

Path B – Differential Reliability: Decide that the shared reliability compact should not be maintained for all loads in a period of structural scarcity and develop the operational and commercial framework to explicitly differentiate reliability. This could be implemented geographically (different states or zones procuring different levels of reliability) or by customer class (for example, with residential and native loads insulated from curtailment while unbacked new large load additions are curtailed first). Path B focuses on physical accountability – those who do not bring or fund supply cannot lean indefinitely on the shared pool – but it requires a fundamental reorientation of how the PJM system allocates reliability as a scarce good.

Path C – Energy Market Transition: Pursue a deliberate, phased shift of revenue recovery from the capacity market to the Energy and Ancillary Services markets, paired with long-term forward energy contracting requirements to protect consumers from increased energy price volatility and to support investment. Like Path A, Path C assumes the shared reliability compact can be maintained; it differs not on whether to preserve universal reliability standards, but on which financial instrument – the administered capacity product or the underlying energy commodity – is best designed to sustain them. To be clear, this path should not be interpreted as a swap to an “energy-only” market. While the concept is to focus on maximizing the efficiency and transparency of the E&AS markets and making those products the central focus for valuing contributions to reliability and, ultimately, investment, we still assume the existence of a capacity market to backstop revenues needed for resource adequacy. This path explores the potential advantages and trade-offs of an explicit and progressive shift of revenue recovery from the capacity market to the E&AS markets through an increase in the E&AS market price limits (i.e., scarcity prices).

These paths are not fully mutually exclusive. Elements of Path A (mandatory hedging) are compatible with and potentially necessary for Paths B and C. E&AS market reform is a prerequisite for Path C and a beneficial complement to Paths A and B. The critical choices are about direction – which compact is the region trying to preserve, and what does that require from the market design?”