When Power Markets Fail at Record Prices: A Global Warning from PJM

December 2025 | EnergyStrat – Power & Energy Markets

The global power sector is entering a deeply paradoxical phase. Electricity demand is accelerating - driven by AI, hyperscale data centres, electrification, and industrial policy - yet power systems are becoming less reliable, not more. Capacity additions are rising, but reserve margins are thinning, grid stress is increasing, and regulatory intervention is becoming routine.

The recent failure of the PJM Interconnection capacity auction in the United States is a critical warning. Despite clearing at record prices, the market failed to procure sufficient capacity to meet its own reliability standards. This is not a regional market malfunction. It is a leading indicator of a broader global challenge facing power systems worldwide.

PJM: A Canary in the Global Power Market

In December, PJM’s latest capacity auction cleared at the regulatory price cap for the third consecutive year. More significantly, it failed to secure adequate capacity to meet its targeted reserve margin—marking the first time PJM has fallen short of its reliability requirement at such price levels.

For decades, power market theory assumed that high prices would resolve scarcity by attracting new supply. PJM’s experience exposes the limits of that assumption in today’s power systems. Price signals alone are no longer sufficient when structural, regulatory, and political constraints delay or suppress supply response.

This failure matters because PJM is not an outlier. It is one of the most sophisticated power markets globally—and therefore a bellwether.

Why This Is Not a Cyclical Price Spike

Three structural forces distinguish the current situation from past volatility. Each is playing out across developed and emerging markets alike.

1. Supply Has Become Structurally Inelastic

Across regions, new generation and transmission face prolonged development timelines:

• Interconnection queues stretching five to seven years
• Permitting delays and local opposition
• Rising capital costs and financing constraints

In PJM, only a small fraction of queued projects translated into cleared capacity, despite record prices. Similar patterns are visible in Europe’s offshore wind grids, Southeast Asia’s gas-to-power developments, and Middle Eastern power expansions tied to desalination and hydrogen.

The constraint is no longer ambition—it is execution.

2. Market Design Is Colliding with Political Reality

Power markets increasingly operate under political ceilings rather than economic logic:

• Price caps to protect consumers
• Emergency reliability mechanisms
• Ad hoc capacity and support schemes

In PJM, administrative price caps muted the investment signal required to accelerate supply. Yet removing these caps is politically contentious. This tension—between economic efficiency and political acceptability—is now structural, not temporary.

Globally, this has created a widening “missing money” problem: systems demand reliability, but markets are not consistently allowed to pay for it.

3. Demand Is Changing Faster Than Planning Models

AI and data centres are reshaping electricity demand:

• Large, concentrated, non-deferrable loads
• High reliability requirements
• Localised grid stress

Traditional planning assumptions—built around incremental, predictable growth—are failing. From Ireland and the Nordics to Singapore and the Gulf, regulators are confronting the same question: how to integrate massive new loads without destabilising the system.

PJM is simply experiencing this reality earlier—and more visibly—than most.

Reliability Risk Is No Longer Theoretical

When reserve margins fall below target levels, the consequences are operational:

• Increased probability of emergency grid actions
• Greater reliance on demand response and curtailment
• Heightened exposure to extreme weather events

PJM’s capacity shortfall translates directly into higher system stress during peak conditions. Similar risks are emerging globally as electrification outpaces investment in firm and flexible capacity.

Reliability, once taken for granted in developed markets, is becoming a strategic variable.

A Strategic Shift: Power Consumers Are Becoming Power Strategists

One of the most important developments in global power markets is behavioural rather than technical.

Large electricity consumers—particularly data centres and industrial users—are no longer treating power as a passive utility cost. Faced with volatile pricing, reliability risk, and regulatory uncertainty, they are adopting portfolio-based energy strategies, combining:

• Long-term capacity and reliability contracts
• Behind-the-meter generation and storage
• Demand response and load flexibility
• Operational resilience and contingency planning

In effect, many large consumers are becoming quasi-utilities, actively managing their exposure rather than outsourcing it entirely to the market.

What PJM Teaches the World

The PJM experience highlights lessons with global relevance:

• High prices do not guarantee timely new supply
• Capacity mechanisms cannot compensate for grid and permitting bottlenecks
• Political intervention is becoming permanent, not exceptional
• Reliability is being repriced—unevenly and inefficiently

Markets that assume a return to pre-2020 pricing, volatility, and risk profiles are likely underestimating the persistence of today’s constraints.

EnergyStrat View: The New Normal Through the Late 2020s

Our base case is that elevated capacity and reliability costs will persist across many regions through at least the late 2020s. While new supply will eventually arrive, it is unlikely to restore historical reserve margins or price levels in the near term.

The more likely outcome is a hybrid power system:

• Partial market signals
• Expanded bilateral contracting
• Greater self-supply
• Continued regulatory intervention

For utilities, investors, policymakers, and large power consumers, the strategic question is no longer whether markets will change—but who adapts fastest and who absorbs the risk.