Price Caps and the Electricity Doom Loop

Image shows someone climbing up a ladder.

I have written in the last three or four years, at least seven times, that you have a free market or you do not, specifically when it comes to deregulated electricity markets. Here are excerpts Chat pulled for us:

“Governments and regulators cannot keep their hands off ‘free’ markets, and therefore, they will fail.” — Electricity Market Manipulation – Higher Costs, More Emergencies (June 6, 2023)

“I’ve written this blog for over 15 years… I’ll bet at least 100 times that renewable subsidies and ‘free’ markets do not work as advertised to lower electricity prices.” — Two Questions for Electric Utility Stakeholders (December 9, 2024)

“If you want to run out of something, put a price cap on it.” — Regulatory Bureaucracy Drives Electricity Prices Higher (September 2, 2025)

“Where is the competition?” — after discussing renewable subsidies, minimum offer price rules (MOPRs), price floors, price caps, tax credits, and other market interventions in 1,500 Pages of Deregulation (February 28, 2023)

Price Caps

Specifically, price caps will destroy the market. If you want to wait in line for a week or maybe forever, put a $2.00 price cap on a gallon of gasoline. Last week, Utility Dive published an article, PJM Capacity Auction Hit Price Cap, Reserve Shortfall Grows. Duh! The shortfall will continue to grow until the market runs out of electricity in hot weather. See the gasoline example.

Specifically, PJM’s capacity auction for 2028-2029 delivery year hit the $325 per MW-day ($119 per kW-yr). If I take $119 per kW-yr and apply a weighted average cost of capital (WACC) of 12%, I get about $990 per kW. The cost of new entry (CONE), which includes return on capital, depreciation, O&M, property taxes, insurance, etc., is about twice that much. CONE ranges from $1,600 to $1,700 per kW in first cost. Chat pulled Table 1 together for us.

Table 1 Cost of New Entry, Various Utilities

Zones	CONE ($/MW - year)	Implied Capital ($/MW) @ 12% WACC	Implied Capital ($/kW)
PSE&G, JCP&L, Atlantic City Electric, PECO, Delmarva, RECO	$198,200	$1,651,667	$1,652/kW
BGE, Pepco	$193,100	$1,609,167	$1,609/kW
AEP, Dayton, APS, Duquesne, ATSI, DEOK, EKPC, Dominion, OVEC (ComEd excluded beginning 2026/27)	$197,800	$1,648,333	$1,648/kW
PPL, Met-Ed, Penelec	$199,700	$1,664,167	$1,664/kW
ComEd	$201,714	$1,680,950	$1,681/kW

Key:

AEP – American Electric Power
APS – Appalachian Power Company
ATSI – American Transmission Systems, Incorporated
BGE – Baltimore Gas and Electric
ComEd – Commonwealth Edison
Dayton – Dayton Power & Light (now AES Ohio)
Delmarva – Delmarva Power & Light Company
DEOK – Duke Energy Ohio and Kentucky
Dominion – Dominion Energy Virginia (formerly Dominion Virginia Power)
EKPC – East Kentucky Power Cooperative
JCP&L – Jersey Central Power & Light
Met-Ed – Metropolitan Edison Company
OVEC – Ohio Valley Electric Corporation
PECO – PECO Energy Company
Penelec – Pennsylvania Electric Company
Pepco – Potomac Electric Power Company
PPL – PPL Electric Utilities
PSE&G – Public Service Electric & Gas
RECO – Rockland Electric Company

Readers could have read the Rant, but to back me up, “We knew that the shortfall was coming, but the outcome demonstrates that the current system doesn’t work to bring online new capacity or stimulate demand response [my emphasis], the two things we need the most,” Julia Hoos, head of USA East at Aurora Energy Research, said in an email to Utility Dive Tuesday.

“New generation needs “significantly more” than the $325/MW-day price cap to be financially viable, according to Hoos. Without a price collar, the auction would have cleared at nearly $555/MW-day across PJM’s footprint and $777/MW-day in PJM’s Commonwealth Edison zone in northern Illinois, according to the grid operator.”

Half Price Doom Loop

Hmm, $555 to $777 per MW-day = twice the cost of the cap as I demonstrated above.

And, it doesn’t work for demand response either, as the DR capacity that cleared fell by 277 MW to 7,365 MW.

Hoos was further quoted, “The [planned] backstop auction was intended to be a one-off, but it’s hard to see how we can return to normal after this. Lowering prices [with the price collar] was definitely politically attractive [1]in the short term, but now we’re well on our way to facing an intervention doom loop.”

Yep, welcome to Energy Rant, 2023.

A Glimmer of Brilliance

And then, somehow miraculously, this brilliant article, The grid’s fastest-growing resource isn’t generation. It’s flexibility, by former PJM board member Jeanine Johnson, provides a guide to sanity.

Here is a consideration for FERC, ISOs, RTOs, utility commissions, and utilities: the grid will be managed one way or another. Will it be managed proactively with load management and flexibility to meet the required delivery price, rather than by artificial caps set by ignorant lawmakers, or will it be managed by brute force through rolling outages?

For example, FERC Order 2222, affectionately known as 2×4 (two by four, like fingers across the chalkboard to purists), was issued to allow distributed energy resources (DERs) to compete in wholesale markets on a level playing field with supply resources. Ms. Johnson notes that it took PJM five (5) years to bring DER aggregation to the market. Do you think PJM received 2×4 with open arms, saying, “Great idea, we’ll get right on that.” Where is the sand for those gears?

She writes it’s a governance problem, as I described in Regulatory Bureaucracy Drives Electricity Prices Higher. I provide the trend. The experts deliver proof points with facts and details. She notes that “foundational operating agreement is conditioned on approval by a members committee of market participants, under sector-weighted voting.” In other words, the tyranny of the majority. This is competition? It would be like the BoDs of the big three voting on Tesla’s strategy back in 2010. It is another clear example of why a “deregulated” electricity model will fail.