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Capacity charges for delivery year X are set in the PJM capacity auction typically 3 years in advance. For example, the 2025 capacity prices were set in 2022. This gives market participants time to plan. Knowing prices years ahead theoretically allows generators to invest if prices are attractive.
Capacity Charges Explained: The Hidden Cost in Your Ohio Electricity Bill
Capacity charges are one of the most misunderstood line items on Ohio electricity bills. These charges pay power plants to be available during peak demand periods—even if you don't use power then. Understanding how capacity works, why charges are rising dramatically, and what you can do about it is essential for controlling energy costs.
Why Is Your Ohio Electricity Bill So High? Decoding PJM Capacity Charges
Your electricity bill likely includes a line item for "capacity" or "reserve margin charge." This isn't for energy you use—it's for the availability of power plants to serve peak demand. The 2025 PJM capacity auction caused capacity charges to spike 833%, making this invisible cost suddenly very visible.
The Capacity Concept
Imagine a power plant that generates electricity. The utility must ensure enough plants exist to handle peak demand (typically summer afternoons at 3-6 PM). The plant owner gets paid two ways:
- Energy payment: Money for electricity actually produced and sold
- Capacity payment: Money for being available during peak times
You pay capacity charges whether you use power during peak times or not. It's a system-wide cost passed to all customers.
Think of it like an insurance premium for the power system. The utility collects premiums from all customers to ensure generation capacity exists when peak demand hits. When demand forecasts suggest capacity is tight (as they do now), premiums rise significantly.
| Factor | Explanation | Your Impact |
|---|---|---|
| Capacity Price per kW | Market-set price from PJM auction (e.g., $150/kW) | You pay this for each kW of your peak demand |
| Your Capacity Tag | Your share of total system peak demand (e.g., 0.001%) | Determines your obligation to pay |
| Annual Capacity Cost | Peak kW × Capacity Price ÷ 12 months | Divided into monthly bills |
| Seasonal Adjustment | Capacity costs peak in summer (higher prices); lower in winter | Your bill varies seasonally even with same usage |
Your 'Capacity Tag': How One Peak Hour Can Inflate Your Bill All Year Long
Your capacity tag—your assigned percentage of system peak demand—is calculated during one specific hour: the PJM peak demand hour. This single hour locks in your charges for an entire year.
How Your Capacity Tag is Determined
PJM identifies the hour during the year when total system demand is highest (typically a summer afternoon). Your capacity tag is your peak demand during that exact hour as a percentage of total system demand.
- Example: PJM peak is 175,000 MW. Your facility uses 500 kW during that hour. Your capacity tag is 500/175,000 = 0.286%
- You pay: 0.286% of total PJM capacity costs for the entire year
- Regardless: Of whether you use any power on other days/times, your percentage stays locked
The Peak Hour Problem
If your facility has unusual peak demand on the PJM peak day (unexpected spike, equipment malfunction, unusual production run), you lock in inflated charges for an entire year. A single anomalous hour can cost you thousands annually in excess capacity charges.
Example: Your normal peak is 400 kW. A production surge causes 600 kW demand during the PJM peak hour. Your tag increases 50%, permanently raising your annual capacity costs by $3,000-5,000 for a situation that lasted just one hour.
This creates strong incentives to prevent peak hour anomalies. Smart energy management focuses on avoiding demand spikes during summer peak periods to control your capacity tag.
Beat the System: 3 Proven Strategies to Slash Your Ohio Capacity Costs
While you can't control PJM capacity auction prices, you can reduce your exposure through demand management and strategic planning.
Strategy 1: Reduce Peak Demand
Every 1 kW reduction in your peak demand during the PJM peak hour saves you 1% of your capacity costs indefinitely. A 50 kW reduction at $150/kW capacity price saves $9,000 annually. Focus on preventing demand spikes during summer afternoons (2-6 PM).
How: Shift non-urgent loads to off-peak hours, optimize HVAC, control equipment scheduling.
Strategy 2: Participate in Demand Response
PJM demand response programs pay businesses to reduce usage when the grid is stressed. Participating generates revenue that offsets capacity costs. Typical payments: $200-2,000+ monthly for reducing 10-50 kW during emergency periods.
Strategy 3: Install Onsite Generation
Solar, natural gas generators, or batteries reduce your draw from the grid. During peak demand periods, onsite generation can prevent you from hitting high demand during the PJM peak hour. The reduction in your capacity tag provides ongoing annual savings.
Strategy 4: Load Shifting to Off-Peak
If possible, concentrate flexible operations (manufacturing, data processing, water pumping) during off-peak hours. This reduces your peak demand without reducing total consumption, directly lowering your capacity tag.
Strategy 5: Thermal Storage
Ice storage tanks, hot water tanks, and other thermal storage allow you to use cheap off-peak power to create cooling/heating stored during peak periods. This flattens your demand profile without reducing comfort or productivity.
Strategy 6: Monitor Your Peak Daily
Some utilities provide real-time or near-real-time peak demand data. Track your peak and watch for anomalies. If you see an unexpected spike, investigate immediately. Fixing the problem before the PJM peak hour prevents an entire year of inflated charges.
Combined, these strategies can reduce capacity costs by 20-40%, generating savings of $5,000-15,000+ annually for mid-size businesses.
Take Control Now: How an Energy Advisor Becomes Your Secret Weapon Against High Bills
Capacity charges are complex and often invisible. Energy advisors and procurement specialists can identify opportunities you miss.
What an Energy Advisor Does
- Bill Analysis: Itemizes charges; explains capacity and other hidden costs
- Demand Profile Analysis: Identifies your peak demands and patterns
- Capacity Tag Optimization: Recommends demand reduction to improve your tag
- Supplier Negotiation: Gets competitive rates; structures contracts optimally
- Program Identification: Finds demand response and efficiency incentive programs
- ROI Analysis: Models savings from efficiency investments and programs
Most energy advisors charge on a success-based fee structure—they only earn money if you save money. This aligns interests and makes the service essentially risk-free.
The Advisor's Value
A good energy advisor typically identifies $5,000-50,000+ in annual savings for small to mid-size businesses. Advisor fees are usually 10-20% of savings. So a $10,000 annual savings costs you $1,000-2,000 in advisor fees—still netting you $8,000-9,000 in benefits, plus ongoing savings in future years after the advisor's engagement ends.
Capacity Charge FAQs
Capacity prices reflect market expectations about generation supply and demand. Power plant retirements reduce supply, driving prices up. High demand growth also raises prices. Weather forecasts, natural gas prices, and policy changes all influence expectations about future capacity needs, creating volatility.
Yes, if you generate 100% of your power onsite. However, you still typically remain connected to the grid as a backup and pay for that standby capability. Partial onsite generation (50%) eliminates capacity charges only for the portion you generate. The economics of 100% onsite generation are challenging for most businesses.
Partially. PJM capacity auctions are market-based, but PUCO oversees how utilities recover capacity costs from customers. Utilities cannot mark up or manipulate PJM auction prices; they pass them through essentially at cost. However, utility delivery charges remain regulated.
Possibly, but not soon. For prices to fall, either generation capacity must increase (reducing supply tightness) or demand must fall significantly. Neither is expected in the near term. Plan for capacity charges to remain at elevated levels for 5-10 years at minimum.
Start Optimizing Your Capacity Costs Today
Capacity charges are a fixed part of your electricity bill—for now. But reducing your peak demand directly reduces your ongoing capacity burden. Small changes now create years of savings.
Understand your bills and identify optimization opportunities.