Understanding Electricity Capacity Costs: What Your Business Needs to Know

For any business that relies on electricity—which is virtually all businesses—energy costs are an unavoidable part of doing business. While most business owners and managers are familiar with energy supply and delivery charges, fewer are aware of a crucial component quietly shaping their electric bills: capacity costs.

What Are Capacity Costs?

Capacity costs are a portion of your electricity bill designed to ensure power plants have enough resources available to meet demand during times of peak usage —think hot summer afternoons when air conditioning units are running full tilt across the region. These costs are not about how much electricity your business uses, but rather about the availability of power when it’s most needed, at any particular moment.

In essence, capacity charges are in place to:

• Support the operation and maintenance of power plants.
• Fund investments in grid reliability.
• Ensure the grid can deliver electricity during periods of peak demand.

Unlike energy supply costs, which fluctuate with usage and market conditions, capacity charges are forward-looking. They anticipate future needs and spread the cost of ensuring reliability across all users of the system, based on each user’s (or company’s) portion of the grid’s total demand.

Why It Matters to Your Business

Whether you run a manufacturing plant, a large office, or a multi-site operation, capacity costs affect your bottom line. And while all businesses are subject to these charges, those with higher demand during peak periods are impacted most significantly.

Businesses with large HVAC systems, industrial machinery, or other high-demand equipment should pay special attention. You may not be able to change the way capacity is structured, but you can influence how much you pay.

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Regulatory Updates: What’s Changing?

The Federal Energy Regulatory Commission (FERC) recently (April 2025) approved updates to capacity market pricing, establishing a price ceiling of $325/MW-day and a floor of $175/MW-day. For the current period, from June ‘25 through next June ‘26, the cleared price is set at $270/MW-day. These prices are part of how regional grid operators, such as PJM Interconnection, ensure enough demand will be available in future years.

The first auction results for the 2026-2027 capacity year is currently scheduled for July 22, 2025. While that may seem far off, businesses need to understand that today’s energy behavior affects the charges they’ll see up to two to three years down the line.

How Are These Charges Applied?

Capacity charges are largely based on your company’s Peak Load Contribution (PLC). This is a value that represents your business’s electricity demand during the system’s five highest-demand hours in the summer.

Here’s how Peak Load Contribution it works:

• Grid operators track usage especially during peak demand periods.
• Your demand during those few critical hours determines your PLC.
• That PLC is then used as part of the calculation to set the capacity charges applied to your bill in future years.

The good news? You can influence your PLC—and ultimately reduce your capacity obligation—by curtailing electricity usage on peak days.

Curtailment: Your Business’s Best Strategy

Curtailment refers to reducing your electricity demand during peak demand hours, often through actions like:

• Adjusting thermostat settings temporarily.
• Rescheduling non-essential production activities.
• Utilizing backup generators.
• Implementing automated demand response systems.

Even small changes, if made during the right hours, can make a significant difference in your PLC and therefore your future capacity costs. For businesses with flexibility or energy-intensive processes, curtailment can be a highly effective strategy.

Should Your Business Curtail?

Not every business is well-suited to curtail, and that’s okay. The decision depends on a number of factors, including:

• Your current energy demand profile.
• Operational flexibility.
• Availability of energy management systems.
• Potential savings versus cost of disruption.

If your business is interested in understanding whether curtailment makes financial sense, or how to better manage peak day demand, our consulting team is here to help. We provide detailed assessments tailored to your operations, and can work with you to:

• Interpret how the new capacity rates affect your specific business.
• Develop a strategy to optimize your PLC.
• Implement tools and practices that support cost control and reliability.

The Bottom Line

Capacity costs are here to stay, and while businesses can’t avoid them entirely, they can take proactive steps to reduce their financial impact. By understanding how these charges work—and by making smart decisions during peak events—you can better manage your energy budget and position your business for long-term savings.

As we approach the upcoming capacity auction and as the summer season ramps up, now is the perfect time to evaluate your energy strategy. Whether you’re new to PLC management or looking to refine an existing plan, we’re ready to assist.

Ready to take control of your capacity costs?

Reach out to our consulting team today to schedule a personalized review and start building your energy savings plan.

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