The short answer
Capacity markets (PJM, NYISO, ISO-NE, MISO) pay power plants to be available even if not running. Customers pay capacity charges based on their share of system peak demand. PJM uses 5CP (5 highest peak hours of the prior summer) to set each customer's Peak Load Contribution (PLC). Curtailing during those 5 hours can cut next year capacity charges 15-30%.
Capacity markets pay power plants to be available — separate from energy markets that pay them to actually run. PJM, NYISO, ISO-NE, and MISO run capacity markets. ERCOT does not (it relies on scarcity-priced energy markets to incentivize capacity). For commercial and industrial customers, capacity charges drive 15-40% of total electricity bills. Understanding how your peak demand sets your capacity tag — and how to reduce it — is the highest-ROI commercial energy move outside of supplier shopping.
Why capacity markets exist
Energy markets only pay plants when they run. In normal times, plants needed only for peak hours would never be profitable.
Capacity markets pay plants $/MW-day for being available. This funds the peakers, batteries, and demand response that keep the grid reliable on the hottest summer afternoon.
ERCOT chose energy-only — let scarcity prices spike to $5,000-$9,000/MWh during shortage. February 2021 showed this fails when extreme weather coincides with gas shortage.
How PJM mechanics flow to your bill
PJM auctions capacity 3 years ahead of delivery. Plants bid $/MW-day to be available; cheapest clear first. Cleared price varies by zone ($30-$330/MW-day historically).
Each customer's Peak Load Contribution (PLC) is calculated from their kW usage during the 5 highest peak hours (5CP) of the prior summer (June-September).
Annual capacity charge = PLC (kW) x cleared zonal capacity price ($/MW-day) x 365 days, billed monthly.
A 100 kW commercial customer in eastern PA with $250/MW-day cleared price pays: 0.1 MW x $250 x 365 = $9,125/year just in capacity.
How to reduce PLC and 4CP exposure
Watch peak forecast notifications: PJM publishes daily 5CP risk forecasts to alert market participants when the next-day load is likely to set a 5CP peak. Top 5 days are usually obvious heat waves with 95F+ forecast highs and high humidity. Subscribing to the alert feed is free for most commercial customers.
Curtail during forecasted peak hours: shut off non-essential equipment between 2 and 6 PM on the highest-forecast heat-wave days. Even a 25 to 50 percent load reduction during those 5 hours cuts your PLC by an equivalent percentage for the next 12 months. The savings flow through monthly capacity bills.
Some commercial and industrial customers cut PLC 30 to 60 percent through a structured curtailment program. Savings: $5,000 to $80,000 per year on mid-size loads, $50,000 to $500,000 per year on larger industrial sites. The cost of curtailment (lost production, employee overtime, deferred maintenance) is typically much smaller than the capacity-charge savings.
The capacity-tag-management-pjm-ercot guide has the full operational playbook including the ERCOT 4CP equivalent. Many third-party services (CPower, Voltus, Enel X) offer turn-key PLC management for a fee or revenue share.
Recent PJM auction history and what it means
PJM 2025-2026 capacity auction (delivery year June 2025 through May 2026) cleared at $269.92 to $329.17 per MW-day across most zones — roughly 7 to 10 times higher than the $35 to $50 per MW-day prices that prevailed for most of the 2010s. This is unprecedented.
Three drivers stacked: coal-plant retirements removing baseload generation faster than replacement is built, slow interconnection of new gas and renewable resources, and accelerating data-center load growth in zones like Northern Virginia. The capacity supply-demand imbalance compounded across multiple auction years.
Flow-through to bills: customers in PJM zones (PA, OH, MD, NJ, DE, DC, parts of VA, WV, IL, NC, MI, KY, IN) are seeing 8 to 15 percent total bill increases in 2026 because of the capacity-charge component. Locked supply contracts insulate the supply portion only; the capacity portion still moves with the auction outcome.
For 2026-2027 (delivery year June 2026 through May 2027), PJM auction outcomes will determine whether prices stabilize or rise further. Some grid analysts expect another high-priced clear; others expect new generation to clear the queue and bring prices down. Track PJM auction announcements for the most current data.
Infographic
PJM capacity auction clearing price by year
ERCOT energy-only — a different reliability approach
ERCOT (Texas) chose an energy-only market structure rather than capacity payments. Generators in ERCOT get paid only when they actually run, not for being available. The theory is that scarcity pricing during shortage events (capped at $5,000 to $9,000 per MWh) provides enough financial incentive to build capacity.
February 2021 was the most extreme test of this design. A combination of extreme cold, gas-pipeline freezing, and generator outages drove ERCOT prices to the $9,000 per MWh cap for 4 consecutive days. Some Texas customers on real-time pricing plans saw individual residential bills of $5,000 to $50,000 for a single week.
For Texas commercial customers, the 4CP (4 coincident peak) period in June through September sets next-year transmission cost allocation. Curtailing during the 4CP windows cuts transmission charges 20 to 40 percent. The capacity-tag-management-pjm-ercot guide covers ERCOT 4CP mechanics.
Whether energy-only or capacity-market structures produce lower long-term bills is genuinely debated by economists. Both have proponents. ERCOT customers benefit from typically lower average prices but face extreme exposure during scarcity events; capacity-market customers pay slightly higher average prices but have more reliable bill structures.
Recap
Bottom line
Capacity markets are the line item that funds grid reliability — payments to power plants and demand resources that stand ready to deliver electricity during peak demand. PJM, NYISO, ISO-NE, and MISO operate capacity markets; ERCOT operates an energy-only market with scarcity pricing instead. Both structures have proponents and trade-offs.
For 2025-2026, PJM customers face record-high capacity charges driving 8 to 15 percent total bill increases. The cleanest defense for residential customers is locking a fixed supply contract (which insulates supply, though not the capacity component). For commercial customers, active PLC management through curtailment during forecasted 5CP peaks can cut capacity charges 15 to 30 percent. The capacity-tag-management-pjm-ercot, demand-charge-strategy, and demand-response-rebate-guide guides cover the operational playbook.
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