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PJM: We Must "Test" Axiom That Resource Adequacy Approach Must Facilitate Retail Choice Through Short-Term Signals
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PJM, in a new "frank" assessment of the current electricity market landscape, said that the industry must "test" several long-term axioms which have driven wholesale market design and resource adequacy policy, including the principle of facilitating retail
electric choice through short-term signals
In a new report on market design, PJM does not recommend any specific policy, but posits three alternative paths for consideration in light of what PJM termed a "credibility trap" of the current capacity market design (which PJM explains as high prices reflecting, as designed, scarcity conditions to incent new investment, but which prompt political intervention which suppresses market-driven outcomes)
PJM's report highlights longer-term default service contracts as the simplest way to remove the credibility trap
"Reforming the regulatory framework to permit -- or require -- state-regulated LSEs to execute longer-term bilateral
energy hedges is the most direct and least administratively complex path toward resolving the credibility trap. It does
not require PJM to administer a new centralized product; it requires state regulators to update procurement rules that
were written for a different market environment," PJM's report states
PJM said that policymakers must address foundational questions on market design, including whether, as is current policy, resource adequacy is a "common good" (the shared reliability compact), or whether reliability must be "rationed", with certain customers having less priority in being served with supply
PJM said that policymakers must answer whether the primary long-term hedging instrument should be a capacity product, or whether policymakers
should make a deliberate shift of revenues supporting resource adequacy to the energy market with long-term
contracting of an energy product
One of the three alternatives proffered by PJM is a multi-year forward capacity obligation on retail suppliers
Specifically, the three alternatives presented by PJM are:
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)
PJM's report states, "For two decades, we have operated under the assumption that the policy objectives valid at the inception of the
Reliability Pricing Mechanism (RPM) -- namely, coordinating entry/exit decisions around the margin, facilitating retail
choice through short-term signals and, at the highest level, reliability at least cost -- would remain valid indefinitely.
Today, we must test those axioms. Rather than assuming the status quo is the only baseline, this paper explores
alternative combinations of internally consistent assumptions."
PJM's report further states, "the standard one- to three-year
forward hedging utilized by most default service providers is wholly insufficient to protect consumers from the cost
impacts of a sustained supply deficit."
Within Path A described above, PJM's report notes several approaches. An individual multi-year forward hedging requirement could be placed on each LSE, or PJM could conduct a mandatory & centralized long-term procurement on behalf of all LSEs
Of the latter approach, in which PJM would conduct capacity procurements for all LSEs, PJM said, "Relative to LSE hedging requirements, this approach provides less flexibility for LSEs and market participants in
setting their own long-term contract terms but may work better for restructured states that currently have less visibility
into the forward obligations of individual LSEs under retail choice."
PJM's report also says that long-term SOS contracts, "improve affordability, stability and investability signals," but the report notes that such long-term SOS contracts include trade-offs, and may inhibit customer
switching and retail choice
PJM's report says that, if the current SOS procurement design (shorter-term contracts, which in some states are required by statute) has been a primary barrier to longer-term contracting for certain LSEs, "and the retail customers under default
service represent those that were most impacted by the sudden price surge and affordability concerns, the most
direct solution may be to adjust the default service procurements in a manner that better promotes longer-term
contracting and price stability for customers," with the report again noting trade-offs inherent in such a policy
PJM in a news release said, "PJM presents these paths and the foundational questions that motivate them not as a unilateral market design prescription, but as the framework for a structured, transparent discussion with all relevant stakeholders."
"The choices embedded in these paths involve genuine trade-offs, and those trade-offs affect different stakeholders uniquely," the paper states. "The goal of this paper is to ensure those trade-offs are visible and that the region’s decision-making process is informed by a clear understanding of what each path requires and what it delivers."
Link to PJM report
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PJM: Standard 1-3 Year Forward Hedging Used For Most Default Service Is, "Wholly Insufficient To Protect Consumers From The Cost Impacts Of A Sustained Supply Deficit"
PJM: Longer-Term SOS Contracts, "Improve Affordability, Stability And Investability Signals"; Are, "Most Direct" Solution To Restoring Credibility To PJM Markets
Options Presented By PJM Include Mandatory Long-Term Forward Capacity Requirement For Retail Suppliers
May 6, 2026
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Copyright 2026 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com
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