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PJM Capacity Market Needs Reset as New Gas Project Returns Weaken, Enverus Says

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PJM's current capacity market structure does not provide sufficient economics to support new gas-fired generation at today's construction costs, Enverus said Wednesday.

Enverus Intelligence Research, or EIR, said capital costs for new combined-cycle gas turbine projects have increased sharply from about $1,000 per kilowatt before 2024 to between $2,000/kW and $3,000/kW today.

At current construction costs, merchant gas projects in PJM struggle to generate double-digit returns. EIR said returns drop below 10% once capital spending reaches $2,000/kW, while debt coverage metrics also come under pressure.

Long-duration bilateral agreements could help finance some new projects, particularly where development costs remain near $2,000/kW, according to EIR.

Even with capacity prices held at PJM's current market cap during the first 15 years of operation, developers face financing challenges when project costs rise to $2,500/kW or more, the report found.

EIR's sensitivity analysis showed a plant costing $2,500/kW would require capacity prices of roughly $500/MW-day to reach commercially viable financing levels, well above PJM's existing cap of $333.44/MW-day.

"PJM needs new dispatchable capacity, but the economics of building it have moved faster than the market design," Principal Analyst Scott Wilmot said. "Bilateral contracts and capacity-market parameters will need to reflect the true cost of new entry, or developers may continue to favor existing assets over greenfield projects."

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