Brattle experts have coauthored a new whitepaper prepared for Google, Exploring PJM’s Paths with Long-Term Hedges. The paper builds on and evaluates two potential market constructs described by PJM for mandatory long-term hedging in wholesale electricity markets.

PJM’s Path A would add mandatory long-term capacity hedging to PJM’s existing market construct, while Path C would shift scarcity value toward the energy market with stronger scarcity pricing and rely on a strategic reserve rather than the capacity market to ensure resource adequacy. The authors develop potential designs for the hedging requirements and procurement processes under both paths and, for Path C, examine complementary reforms to energy-market design, interconnection, resource adequacy, and transition.

Key findings include:

Either Path A or Path C may be able to break the market’s “credibility trap” described by PJM, providing a more efficient and durable framework than the status quo, although neither path offers a simple or immediate solution. A central challenge under either approach would be reaching agreement among PJM and the states on the scope, form, and duration of mandatory hedging, likely focused on residential and small commercial customers in restructured states. Hedges would also need to be phased in over several years to avoid locking customers into large volumes of contracts at currently elevated prices.
Path A would be less complex to implement because it retains PJM’s existing capacity-market construct. Existing capacity-market mechanisms could be adapted for long-term procurement and allocation, and capacity is already embedded in retail rates and state procurement frameworks. However, capacity is a relatively weak foundation for very long-term contracts because its definition and value can change over the life of a contract as PJM revises accreditation, delivery periods, deliverability rules, and other market parameters.
Path C provides a stronger foundation for long-term contracting and offers greater potential economic-efficiency benefits. Energy is a more concrete and enduring product than capacity, while stronger energy-market scarcity signals would reward resources for being available when and where they are most valuable, decentralize investment decisions, and reduce reliance on administrative capacity accreditations and locational constructs.
Path C could offer additional reliability and efficiency benefits when paired with a more flexible, non-firm “connect-and-manage” interconnection framework. This could allow new resources to enter more quickly and at lower cost while still earning the scarcity value they provide, making the market more adaptable to changing mixes of generation, storage, and flexible demand. Path C could maintain a reliability standard comparable to today’s through a strategic reserve while strengthening operational performance incentives through higher scarcity prices.
Path C would require substantially greater market redesign and a longer transition. Implementing it would require enhanced scarcity pricing, new hedge procurement and allocation mechanisms, expanded credit and risk-management rules, market-power mitigation, a strategic reserve or other resource-adequacy backstop, and significant interconnection reforms. Any transition would therefore need to be gradual and coordinated with the progressive introduction of long-term hedges.

The full whitepaper can be found below.

View Whitepaper

Experts Involved