​PJM describes itself as caught in a "credibility trap." High capacity prices signal that new generation is needed. But those price signals trigger political interventions that undermine investor confidence in PJM's future revenue reliability.

The market is signaling "build." The political response signals "risk."

In a white paper published on May 6, the ISO calls for a fundamental review of the capacity market that has funded its network for two decades.

Key takeaways

• PJM's capacity market is in a "credibility trap": prices high enough to attract investment trigger interventions that undermine the signal.
• PJM has identified three potential paths forward: mandating long-term hedging, rationing reliability across customer classes, or shifting revenue recovery toward the energy market.
• For BESS, the energy market shift is the most favorable path. The hedging path's design will determine whether storage can compete with thermal generation.

Why is this paper being released now?

This white paper comes against a backdrop of a recent capacity shortage. The 2027/2028 base residual auction cleared 134.5 GW of unforced capacity at a 14.4% installed reserve margin. PJM's reliability target is 20%. The system experienced a 6.5 GW shortfall in capacity.

The high prices this shortage would normally produce were held down by a price cap, originally agreed upon between PJM and Pennsylvania in 2025 to protect household electricity bills. On April 28, 2026, FERC extended that cap to cover two more auctions, meaning the intervention will likely suppress the price signal through May 2030.

Credibility concerns aren't new to PJM

PJM frames this as a chronic problem, pointing to a decade of rule changes that have repeatedly damaged investor confidence.

The Minimum Offer Price Rule was expanded then reversed. The methodology for capacity accreditation was revised. Reserve pricing reforms were accepted, then remanded. Auction schedules were compressed and delayed.

The current cycle is sharper because prices are higher and households are seeing the spike on their bills within months, not years. Pennsylvania's governor has said the state will oppose rate hikes that fail affordability tests. AEP is openly questioning whether to remain in PJM.

PJM's three paths forward produce diverging revenue stacks

Path A keeps the capacity market but requires most capacity to be procured years ahead. Either utilities hedge themselves, or PJM procures multi-year contracts on their behalf. It is the most direct extension of the existing market design and reflects CAISO's model.

Path B rations reliability based on newly-defined customer classes. Today every customer is served at the same standard. Path B would treat new large loads, particularly hyper-scaler data centers, as a separate tier. If large loads connect without bringing equivalent generation online, they get curtailed first when the system runs short. PJM is already developing this through its Connect and Manage Senior Task Force, and Texas passed similar legislation in 2025.

Path C shifts revenue recovery for generators toward the energy and ancillary services markets. Scarcity price caps would rise gradually while the capacity market would shrink to a backstop. Long-term bilateral energy contracts, including PPAs and tolling deals, would replace capacity as the primary investment hedge.

The paths are not mutually exclusive. PJM notes that mandatory hedging elements of Path A are compatible with both B and C, while energy market reform is a prerequisite for Path C and complements the other two.

What the paths mean for BESS in PJM

For BESS, Path C is the most favorable. Higher scarcity prices mean more volatility to capture. Additionally, the deepest ancillary services reforms sit under this path.

Path A is more ambiguous. Capacity products have historically anchored to thermal reference units, although BESS now sits alongside gas in PJM's latest Cost of New Entry study. Accreditation rules will determine whether storage can compete head-to-head with thermal under long-term contracts.

Path B could increase BESS procurement by hyper-scalers needing to bring matching supply, but it would not change the revenue stack for storage on the wholesale market.

The timeline for reform is uncertain, but the white paper emphasizes the urgency of finding a path forward. PJM states that the region has "years, not decades" to choose.