When most businesses think about their energy bill, they think about the rate they locked in. But hidden inside every electric bill are capacity costs which can be a major driver of cost that has nothing to do with today’s commodity price.
If you’re buying energy in a deregulated market, understanding capacity costs is essential to controlling risk and building accurate budgets. Here’s what you need to know.
What Are Capacity Costs?
Capacity costs are fees you pay to ensure the electric grid has enough power plants available to meet demand, especially on the hottest or coldest days of the year.
Capacity charges can make up 20-30% of a commercial bill in certain markets and sometimes even more. Unlike your energy rate, they’re driven by how the grid plans for your future demand, not just what you use today.
Grid operators like PJM Interconnection (PJM), Independent System Operator-New England (ISO-NE) and New York Independent System Operator (NYISO) run capacity auctions where power plants get paid to stay ready. The total cost of that readiness is then passed through to customers based on their contribution to the system’s peak demand.
In simple terms, if your business uses more energy during the grid’s peak hour, you pay more capacity costs.
How Capacity Charges Are Determined
Capacity auctions determine the price for each area being served. Prior to each auction, grid operators will provide estimates for each region's peak electricity usage. The auction exists to ensure that there is enough capacity to accommodate the estimated peak usage.
The capacity charges on your bill are made up of two parts, the capacity cost and the capacity tag. The capacity cost is the price set per kilowatt hour (kWh) by the grid operator. The capacity tag is the total kWh used by your building on the peak hours of the peak days.
Capacity tags are determined on an annual basis. At the end of each summer, the regional transmission organization (RTO) is required to identify the highest peak load hours that occurred during a specific period. The utility then determines each customer’s unique load and the customer’s peak load capacity is calculated.
Why Capacity Costs Matter for Your Business
Capacity isn’t a small line item—it’s often one of the top three drivers of cost for commercial buyers.
Capacity auctions, which occur a few times a year, determine capacity prices one to three years before the delivery year. That means decisions happening today affect what you’ll pay far into the future, even if the market looks calm right now.
For example, the July 2025 PJM capacity auction cleared 22% higher than the previous year, meaning many businesses will see significant increases on their bills in the 2026/2027 delivery year.
Bottom Line
Ignoring capacity leads to surprises. Managing it well leads to savings and stability.
If you’ve never seen how capacity influences your bill, or what your next capacity tag might cost you, Energy CX can show you.
We’ll walk you through how capacity is calculated, what you’re likely to pay and how to build a strategy that protects your business. Ready to get ahead of your capacity costs? Book a meeting today.