Tens of billions of dollars of naked capacity exposure is being willed into financial materiality by the Trump administration today.
Lack of liquidity down the curve is no longer an excuse for leaving long term capacity market exposure unpriced and unhedged as the White House forces the long-simmering crisis in PJM’s capacity market construct past the boiling point into a full-fledged official emergency, with an executive order to underline it.
A “backstop” auction for long-term capacity that could underpin financing for gigawatts of new power has existed throughout the brewing crisis in PJM’s base residual auction as an option. PJM’s tariff construct with FERC sketches out the general shape of a 15-year capacity auction when the BRA repeatedly falls short, but there’s plenty of room for interpretation and little precedent for a capacity market auction of this type for this duration.
As it has in other venues, the Trump administration wants to move fast. There’s no preset timeline for invoking the backstop auction, and estimates from market participants and observers this morning ranged anywhere from just 90 days out to a September 2026 implementation after the next capacity auction PJM plans to run mid-year.
Both buyers and sellers in capacity markets, especially auction-oriented markets like PJM, have been hesitant to take on significant duration in managing or even analyzing their capacity price risk. For years, capacity was secondary to power, much of it was locked up in PPAs, and length in supply from legacy fossil fuel assets made it sensible to sit and wait for the new fundamentals imposed by renewable energy buildout to make themselves known.
With today’s announcement, we’re out of the “wait and see” era and into the “#$&@ around and find out” era of capacity markets: there are no longer any excuses for avoiding pricing or managing long-term risk in capacity markets. What’s happening in PJM is a precursor to the impact of looming generation supply shortages across the US, as the capacity price takes its throne alongside the power price as the determining factor in marginal energy economics.
The implications of the response to PJM’s capacity emergency for Noreva clients and US energy markets stretch well beyond the power sector. The call on renewable energy megawatt hours and the future fuel mix in PJM have been thrown open for question, with implications for renewable energy credits. The pace and comparative economics of broad electrification, with impacts for fuel margins and molecule supply and demand dynamics, will be shaped by how long-term capacity auctions influence generation buildout.
Noreva is the only provider of long-term capacity forecasting that is aligned with trading and policy realities through a dynamic modeling interface that goes beyond pure fundamentals and discount rates to capture the volatility markets actually face today. As the attention of the world’s biggest stage turns toward markets unaccustomed to the glare, Noreva clients will have the tools to answer new questions and respond to new risks.
To review our rapidly expanding capacity and power forecasting suite built on over a decade of direct market experience, please contact sales@noreva.ai
