The encyclopedia · Strategy & Leadership · Strategic decision · 2007–2011
PJM paid for capacity years ahead — and prices stabilized
PJM's forward capacity market replaced boom-bust payments with a sloped demand curve; RTO prices ran $40.80, $111.92 and $102.04 per MW-day.
PJM Interconnection
the move
In PJM's wholesale market, generators were paid only for the energy they produced. The old capacity payments used a vertical demand curve, so prices swung between near-zero and extreme — FERC concluded this discouraged investment and threatened reliability, especially in congested areas like Maryland.
PJM replaced it with the Reliability Pricing Model, effective 1 June 2007: annual base residual auctions for delivery years three years ahead, clearing where supply bids meet an administratively set sloped demand curve.
The first three auctions set RTO prices of $40.80, $111.92 and $102.04 per MW-day, while constrained regions paid far more — over $197 per MW-day in the eastern zones — sending a clear signal to build where power was needed.
The old design's boom-bust pricing was replaced with a gradient: the new model gave resources predictable revenue and created a market that generators, states and regulators could all plan around.
why it works
- A forward auction reveals how much capacity the market needs before scarcity arrives.
- The sloped curve turns a cliff into a gradient, cutting the risk of prices swinging between free and priceless.
- Locational clearing prices direct new investment to exactly the places where reliability is threatened.
what transfers
Pay for availability before scarcity hits: a forward auction with a sloped demand curve gives generators predictable revenue and locational signals, so capacity is there when needed.
what came after
RPM became the template for capacity markets across the eastern United States; PJM still runs base residual auctions today, and the debates it triggered about paying for reliability remain live.
references
- Analysis of Options for Maryland's Energy Future (November 2007)
- Resource Incentives: Valuing Resources in PJM's Wholesale Markets (December 2011)
- 2011 State of the Market Report for PJM, Volume 2
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